With 45% of private industry workers having access to general paid time off (PTO) in 2021 and 77% having access to paid sick leave, you might be thinking about updating your own small business’s PTO policy. But do companies have to pay out PTO if an employee leaves or gets fired?
While offering PTO is great for employee satisfaction, you might be worried that the obligation to pay it out will come at an extra expense to your budget, employee schedule, and small business’s limited HR resources.
Whether your company has to pay out PTO or not depends on both your state and company policies. So, let’s discuss when small businesses are required to pay out PTO, the types of PTO compensation, and how PTO payout laws vary state by state.
When do small businesses have to pay out PTO?
Depending on your state and your small business’s policies, you may have to pay out PTO when an employee leaves your business. So even if your employee quits, you might be on the hook for paying out any PTO they accrued as wages.
You could also face serious fines or legal penalties if you withhold PTO compensation from an employee when they resign from their position.
Types of PTO
Many businesses are moving away from the traditional time off model — with separate vacation days, sick days, and personal days in an employee’s PTO plan — and establishing a general paid time off policy that gives people the freedom to choose how they use their paid days off.
Still, some businesses want more control over how their employees use PTO, so let’s look at the different types of PTO policies you could offer your small business employees.
Even if an employer offers their employees a certain amount of vacation days, they may be allowed to deny vacation days or create policies dictating how to ask for vacation days. For example, a business could require an employee to submit a formal request a month in advance to request specific days off.
Depending on how you set up your small business’s vacation time policies, you may choose to:
- Separate vacation days from sick days
- Combine vacation days with sick days into one PTO plan
- Let employees accrue their paid time off by adding a certain number of days off for every pay period
- Offer a certain amount of vacation days upfront every year as part of a “bank” of paid time off
While vacation time off policies are often on the stricter side, employees can take sick leave when they need to and with little to no notice. Some businesses, however, may request a doctor’s note to approve a sick leave absence.
And, although the Family and Medical Leave Act (FMLA) doesn’t currently mandate that employers pay employees during FMLA sick leave, your state’s paid leave laws might. For example, New York’s state family leave laws currently entitle employees to 67% of the state average weekly wage while they’re on leave.
An employer can choose to make bereavement leave an upfront part of a PTO plan offered alongside sick leave and vacation days. Some employers may not offer it as an upfront benefit but choose to offer it in the unfortunate event that an employee loses a loved one.
Most states don’t allow an employer to punish or fire an employee for taking time off for jury duty, but not all states require employers to offer compensation during jury service.
For example, state laws only entitle Colorado employees to a regular wage of up to $50 a day for the first three days of jury service, while Californian employers don’t have to provide any compensation during jury service.
PTO payouts and the Great Resignation
In the midst of the pandemic and the Great Resignation that prompted as many as 4.3 million Americans to quit their jobs in December 2021, there’s never been a better time to keep PTO payouts top of mind for your small business policies.
While a lack of PTO wasn’t the biggest reason most employees quit their jobs in 2021, a recent Pew Research Center survey found that 45% felt they didn’t have enough flexibility to choose when they could work, and 39% felt they were working too many hours.
Small business owners can combat this kind of employee dissatisfaction by managing time off requests with a streamlined system that makes it easier for individuals to ask for time off in compliance with your company policies. Homebase, for example, makes it easy for employees to make time off requests in a simple, 3-step process with our mobile app.
PTO payout laws by state
Similar to wage and hour laws, PTO payout laws vary from state to state. They can even vary according to county and business in some cases.
We’ve compiled a state-by-state guide of PTO payout laws for you to use as a quick reference, but here are a couple of things to consider before you find your state information in the table below:
- Earned vacation time is the compensation in wages an employee is entitled to for unused vacation time.
- A “use-it-or-lose-it” policy means employees lose any unused vacation or PTO days they’ve accrued at the end of a year, and they can’t ask for it to be paid out or rolled over to the following year.
|PTO Payout Laws by State (as of July 2022)|
|State||Does the state have explicit laws about vacation pay?||Does state law explicitly prohibit a Use-It-Or-Lose-It Policy?||Does the state require vacation payout when an employee leaves?|
|Alaska||No||No, but vacation pay is a vested, or earned, right for employees.||Yes|
|Arizona||Yes. Earned vacation time is considered wages when an organization has established policies or precedent of paying employees for this time.||No||Yes|
|California||Yes. Earned vacation time is considered wages.||Yes. But employers can put an accrual cap in place on vacation time.||Yes|
|Colorado||Yes. Earned vacation time — not sick time — is considered wages.||No, but it’s only permitted if:
|Connecticut||Yes. Wages do not include vacation time, but if the employer offers vacation pay in policy, then they must honor the employment contract.||No||No|
|Delaware||No, but vacation pay is negotiated between employers and employees.||No||No|
|District of Columbia||No||No||Yes|
|Idaho||Yes. Vacation pay is not explicitly considered wages. But if the employer offers vacation pay in policy, then they must honor the employment contract.||No||No|
|Illinois||Yes. Earned vacation is part of “final compensation.”||No. Permitted by state law, but employees have to be educated on this policy.||Yes|
|Indiana||Yes. Any paid vacation offered by employers is considered deferred compensation in place of wages.||No. Permitted by state law.||No|
|Iowa||Yes. Earned vacation is considered wages. Employers that offer vacation pay as part of policy must honor their policies or employment contract.||No||No|
|Kansas||No, but if an employee requests it, an employer must provide a vacation policy to be displayed in writing.||No. Permitted by state law.||No|
|Kentucky||Yes. Earned vacation time is considered wages when an organization has established policies or precedent of paying employees for this time.||No||Yes|
|Louisiana||Yes. For an employee to be paid unused vacation time they have to:
||No. Permitted by state law.||Yes|
|Maine||Yes. Earned vacation time is considered wages when an organization has established policies or precedent of paying employees for this time.||No. Permitted by state law.||Yes|
|Maryland||Yes. If the employer offers vacation pay in policy, then they must honor the employment contract.||No||Yes|
|Massachusetts||Yes. Vacation time is considered wages and employers are required to compensate employees for vacation pay.||No. Permitted by state law, but employers have to give employees fair notice of policy.||Yes|
|Michigan||Yes. Willfully contracted vacation pay is considered a fringe benefit, not wages.||No||No|
|Montana||Yes. But employers are allowed to put a cap on vacation time.||No|
|Nebraska||Yes. Vacation pay is a type of fringe benefit and is considered wages.||Yes||Yes|
|New Hampshire||No. Permitted by state law.||Yes|
|New Jersey||Yes. Accrued and unused vacation are not considered wages.||No||No|
|New York||Yes. If an employer chooses to offer vacation pay, they must honor their policies or terms of their contract.||No. Permitted by state law. Employers must give advanced notice of the policy.||Yes|
|North Carolina||Yes. If an employer chooses to offer vacation pay, they must honor their policies or terms of their contract.||No. Permitted by state law. Employers must post notices in writing about any PTO policies that could result in the loss of vacation time.||Yes|
|North Dakota||No. Permitted by state law. Employers must give fair notice and opportunity for employees to use vacation time.||Yes, but private employers may withhold paying out PTO if:
|Oklahoma||No. Permitted by state law.||Yes|
|Rhode Island||Yes. Earned vacation time is considered wages after one year of employment when an organization has established policies or precedent of paying employees for this time.||No||Yes, but with a minimum of 12 months of employment.|
|South Carolina||Yes. Earned vacation time is considered wages after one year of employment when an organization has established policies or precedent of paying employees for this time.||No||No|
|Tennessee||Yes. Employers do not have to create a written policy if they choose to provide vacation time.||No||Yes|
|Texas||Yes. If an employer chooses to offer vacation pay, they must honor their policies or terms of their contract.||No||No|
|Vermont||Yes. If an employer chooses to offer vacation pay, they are liable to their employees for these benefits.||No||No|
|Virginia||Yes. Employers are not liable to establish a policy for vacation pay.||No||No|
How Homebase can help you manage PTO
When you’re a small business owner navigating employee schedules and compensation on your own, it might seem hard to deal with PTO while staying in your employees’ good books and complying with state and local labor laws.
Homebase’s time clock tool helps small business owners automate their system for time off requests and offer PTO all within one intuitive mobile app.
And with Homebase HR Pro, you can consult with a live HR expert who’ll guide you through the process of creating your own PTO policy.
Do companies have to pay out PTO FAQs
Can a company refuse to pay out PTO?
There’s no federal law that prohibits a company from refusing to pay out PTO, so this depends on your state PTO laws and company policies. For example, if you live in a state like Alaska or California that requires your company to pay out PTO upon termination, then your company could be subject to heavy fines or legal penalties if you don’t.
What are the benefits of a PTO policy?
It’s beneficial for business owners to create PTO policies because of the advantages they can offer both management and employees. Here are a few examples:
- Greater flexibility for employees: Instead of creating individual time off policies for sick leave, vacation, and personal days, a PTO policy lets employees choose how they use their days off at their own discretion.
- More control over employee absences: Unless an employee taking PTO is sick, most PTO policies require employees to give at least a few days’ notice before they take days off to protect the company from too many unscheduled absences.
- Greater trust between employees and employers: When employees can take PTO time for any reason, they don’t feel they have to be untruthful about the reasons for their time off.
- Better for retention and recruitment. Employees generally prefer a PTO policy that lets them use their time off as they choose.
What happens to PTO when you quit?
What happens to PTO when you quit your job depends on both your state and your company. Many states — around half, in fact — require employers to pay their employees in wages for the PTO they accrued while working for their business.
In California, for example, companies are required to pay out PTO at the time of separation at that employee’s current rate of pay and not the rate they were making when the PTO was originally given.