Paying Out PTO: What Happens to Vacation Time When You Quit

Andrew Buck November 9, 2022
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Most companies offer some form of Paid Time Off (PTO) – which might also be referred to as annual leave, vacation time, holiday time, or something similar.

It’s pretty simple how it works as long as the employee is with the company. The employee generally has a yearly allowance (and unused leave may or may not roll over at the end of the year). But what happens to any unused PTO when the employee leaves their job?

Unused PTO may have to be paid out to the employee with their final pay, but not always. Read on to learn more, and get an idea of how this might work in your workplace.

This article is purely for informational purposes, and does not constitute legal advice. Please contact an employment law professional for any legal issues.

Related: 55% of US Employees Don’t Use All Their PTO. Find out why, and why this is a problem.

Do Employers Have to Pay Out PTO When an Employee Quits?

Unused PTO is often paid out when an employee quits or leaves their job, but not in all cases.

First, it depends on the relevant labor laws for the area in which the company is based. Some laws require companies to pay out PTO when an employee leaves their job. Some areas do not mention anything specifically in their labor laws about paying out PTO.

In the US, this is governed by state law (not federal). In other countries, this varies, sometimes covered by national legislation, sometimes state or regional laws.

The company must abide by the law in regards to paying out PTO, before anything else. If the law doesn’t require anything specific here, then it comes down to the company’s individual policy.

The company should have a leave policy and/or employee handbook that states how things like this are to be handled.

This document should clearly say what happens to unused PTO at the end of someone’s employment. In most cases, the company has to follow what their policy states.

If unused leave is to be paid out, it’s generally done so at the employee’s regular working rate. This may be hourly (if the employee’s wages/leave work on an hourly basis), or the equivalent of the number of days’ PTO is to be paid out, if the employee is paid a weekly/monthly/yearly wage.

What Constitutes Unused PTO or Unused Leave?

Unused PTO generally means any accrued, earned or available leave that an employee is entitled to, but has not used, at the time they leave the job.

For example, if employees are given 15 days’ PTO each year, and an employee has only used 10 days that year, when their employment ends, they should have 5 days remaining that may be paid out.

The same goes if leave in the company works on an accrued or earned basis – for example, if employees are given 1 day of PTO for every 1 month worked, any unused leave will be calculated based on the leave accrued up to the point of termination.

If the company has an unlimited PTO policy, unused PTO generally should not apply, since there is no limit or allowance for PTO.

This may be a little tricky in legal terms though, so definitely consult a legal professional to be sure.

PTO Payout Laws By State

Each US state has their own regulations, in terms of what happens with unused PTO when an employee resigns.

The following states, however, have no specific laws regarding paying out PTO:

In most states, it’s required to pay out PTO, only if the company’s policy states that unused PTO will be paid out upon termination. This means it’s up to the company’s discretion (but legally, they must comply with their own policy).

In the following states, companies are required to pay out unused PTO, no matter what is laid out in the company policy:

In addition, Kansas, North Dakota and Rhode Island require companies to pay out PTO in most cases, but do have some exceptions.

For detailed advice, as well as for information for non-US companies and their relevant labor laws, please consult an employment law professional.

Is it Best Practice to Pay Out PTO?

If you’re not legally obligated to pay out unused PTO when someone resigns, is it a good idea to do it anyway?

The answer is up to you. It is an added expense to think about, but the benefits for the business, in terms of goodwill with employees, may be worth it.

Businesses that treat their employees well, and don’t skimp over issues like this, tend to be able to attract better talent and get better results out of their employees.

Another thing to be aware of is that, if you don’t pay out PTO, employees will often scramble to use up any remaining PTO before their employment ends.

This might leave you short on staff, and unable to fulfill deadlines. Whereas, if you were to pay out PTO, employees would be financially incentivized to work out their notice period as normal.

Paying out PTO is another reason that it’s important to use a PTO tracking software that makes it easy to monitor each employee’s outstanding leave balance.

A leave management tool like Flamingo, for Slack teams, is perfect for this. It lets you pull up reports on an employee’s leave activity in just a couple of clicks, and export this data via a CSV spreadsheet to pass on to payroll, HR, or whoever needs it.

Flamingo is free to try, and easy to set up. Try it now to make your life easier.

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