Understanding PTO (paid time off) payout laws is an important part of doing business for any employer who gives paid time off to their employees. There are a couple of reasons why. First, OnPay’s research found that PTO is one of the most requested benefits on an employee’s wish list, so offering it can go a long way to attracting high-quality employees and keeping your top performers from looking at other companies.
Second, there are no federal laws that say you must pay out employees for unused PTO, but some cities and states have passed laws that say businesses have to do this when they part ways with an employee.
But, how do you know how to handle accrued PTO when an employee resigns or involuntarily leaves? Are you required to pay accrued PTO to your employee, or can you establish a use-it-or-lose-it approach?
Because most states have their own PTO laws in place, there is no one-size-fits-all answer. In this employer’s guide to PTO payout laws, we’ll review where each state stands on paying PTO to employees who quit or are terminated, how to stay compliant, and how to keep staff on the same page when it comes to PTO policies.
PTO payout primer
What is PTO?
In its simplest terms, PTO refers to the hours that an employee is paid for, even when they’re not working. Common types of PTO include:
- Sick days
- Vacation days
- Personal days
Extending PTO can make a big difference for team members. It not only allows top-performing employees to unplug, but it also frees up time for personal needs such as doctor’s appointments and oil changes. To learn more about why PTO is important, we spoke with Kelly Beckner, Vice President of Corporate Human Resources and Administration at MBO Partners.
What are the perks of PTO for employees?
“PTO gives employees the ability to integrate work and life in a way that works for them individually,” she explains. “When employees take time from work, they unplug, recharge, or take care of whatever is necessary in their lives, and often they return more engaged and productive.”
“PTO gives employees the ability to integrate work and life in a way that works for them individually. When employees take time from work, they unplug, recharge, or take care of whatever is necessary in their lives, and often they return more engaged and productive.”
— Kelly Beckner, MBO Partners, Vice President of Corporate Human Resources and Administration
In addition, Beckner says that:
- Offering PTO shows that employers care and that they understand that employees have lives outside of work.
- It provides balance and a means for employees to work towards work-life balance and integration.
- It meets employees where they are and provides peace of mind so they don’t have to worry or wonder about whether they can have income continuation during their time off.
- Lastly, it also provides a competitive advantage, so it just makes good business sense. If you don’t offer paid time off or any portions of paid time off, you’re less competitive in the marketplace, and ultimately, it’s going to drive employees to other places.
That said, because there are no federal US laws in place regulating PTO, rules often vary from business to business. For the most part, each company is free to create and offer its own policy regarding paid vacation and sick time, provided that it does not violate any existing state PTO laws.
Even though Uncle Sam doesn’t weigh in on the subject, 20 states and the District of Columbia have instituted various PTO regulations (which we outline a bit further in the article). The takeaway is that if you’re creating a company PTO policy for the first time, be sure to review existing city and state regulations before finalizing guidelines for your business.
How many people currently have access to PTO?
While not all employers offer PTO, according to the Bureau of Labor Statistics March 2022 report, the majority of employers do. The table below indicates the percentage of workers in each category who currently receive some form of PTO.
|Type of Worker||Paid Sick Leave||Paid Vacation||Paid Holidays|
|State and Local Government||92%||61%||68%|
With more cities and states adopting PTO requirements for local businesses, expect these numbers to rise.
Are vacation time and PTO the same thing?
Though vacation and PTO both refer to paid time off, they do have their differences.
- Vacation time is usually a set number of days that a business may provide its employees, customarily increasing the longer a worker is employed
For instance, an employer may offer one week of vacation time to its employees after the first year of employment, increasing that to two weeks after three years. Employers that offer vacation days may also offer sick days as well as paid holidays, but they are all accrued separately.
- In general, PTO refers to paid time off, which can be used for vacation, but may also include sick days, personal days, maternity or paternity leave, jury duty, or family illness
In most cases, a business will offer a set number of PTO days that employees can use throughout the year, without specifying exactly what the day is used for. Some businesses even include paid holidays in their PTO.
Again, we asked Kelly Beckner of MBO Partners for her thoughts. “PTO is an umbrella for all of the different types of paid time off, not just vacation. It is now an umbrella that encompasses all the different ways in which people have paid time off from work, regardless of the need,” she explains.
“PTO is an umbrella for all of the different types of paid time off, not just vacation. It is now an umbrella that encompasses all the different ways in which people have paid time off from work, regardless of the need.”
— Kelly Beckner of MBO Partners
“So, if you tend to think of it in terms of just vacation, you’re simply losing the value of all of the other types of time off that employees often need and can be offered, such as sick, bereavement, jury, maternity, paternity, and personal leave. Even company paid holidays often fall under that umbrella.”
All this being said, keep in mind that when it comes to choosing between traditional vacation/sick days and PTO, it is easier to track PTO than it is to separately track vacation, holidays, and sick pay for payroll purposes.
What is a PTO payout?
PTO payout refers to the compensation that an employee receives for any unused vacation days upon resignation or termination. But because sick days, personal days, and vacation days are not separately accrued, if you’re paying out PTO upon an employee’s termination — depending on your state laws — you may have to pay out all PTO, not just accrued vacation time.
Even if there is no law in place in the state where your business is located, if PTO payout is part of your employee handbook or an employment contract, you are required to pay employees leaving the company based on the information outlined in the handbook or contract.
There are some exceptions. If your company has a use-it-or-lose-it policy in place, you are not required to issue a PTO payout. However, bear in mind that in some states this policy is illegal, so be sure to check with both local and state authorities before adopting this approach. (We’ll have more about use-it-or-lose-it policies later in this article).
If your company offers unlimited PTO, as an employer you’re also exempt from paying out PTO when an employee resigns or is terminated, since PTO is not accrued monthly.
How does a PTO payout affect employees and employers?
Both employers and employees are directly impacted by the rules surrounding PTO policy. PTO payouts increase financial liability for employers, since any PTO accrued is considered a liability, as it represents money owed to employees. In some states, where payouts are mandated, employers have no choice but to pay out any accrued PTO based on the state’s requirements, whether the employee resigns or is terminated, with financial consequences resulting if PTO is not paid out when mandated.
For employees, a PTO buyout option allows them to use days off more judiciously, knowing that they won’t lose that time if they don’t take it. Some businesses may choose to pay out PTO at year end for any unused PTO, reducing the liability they need to carry on their books, while also giving their employees a nice year-end bonus.
What are the PTO payout laws by state for 2023?
PTO payout laws vary from state to state, with many states having no restrictions on paying out accrued vacation time. However, others have chosen to regulate exactly how accrued vacation payouts are handled. In the table below, we list the states requiring PTO payouts and those without specific laws requiring PTO payouts. Those without will defer to employer guidelines.
In any case, employers must abide by the policies written and communicated in their employee handbook, employment contract, or other employer/employee agreement, while also following any mandated state laws.
Next, let’s better understand what use-it-or-lose-it vacation policies are and how they work.
Use-it-or-lose-it vacation policies
Use-it-or-lose it vacation policies used to be extremely popular. This type of policy clearly states that an employee had to use their vacation time by a certain date, usually year-end, or it was forfeited. For employees, that meant that if they finished the year with a week of unused vacation, they would lose those days, since they wouldn’t be carried over into the next year.
While some employers still utilize a use-it-or-lose-it policy, the policy should be clearly explained in an employee handbook and explained to an employee upon hiring. If you’re currently using or considering implementing a use-it-or-lose-it policy for your company, be sure to check with the state where you do business. Some states prohibit this policy including:
- Maine (public employers or businesses with less than 10 employees are exempt)
There are some caveats included in the restrictions, so again, it’s best to check with the state where you do business.
What if your state doesn’t require you to pay out PTO?
In many states, even though the decision to pay PTO to departing employees is left to the employer, it can be a wise business decision. Keep in mind that once a PTO policy has been created, it must be adhered to.
Now that we better understand each state’s rules and regulations, it is time for a quick primer on crunching the numbers around paid time off.
Calculating PTO payout is easy.
For hourly employees, you’ll need to multiply the number of accrued PTO hours by the employee’s hourly wage. For example, if your employee has 35 hours of PTO and gets paid $20 an hour, you would multiply that to get the PTO payout:
- 35 hours x $20 = $700
Salaried employees require an extra step since you’ll first have to calculate their hourly wage. Let’s say your full-time employee makes $60,000 a year and has 45 hours of accrued PTO.
- You’ll divide $60,000 by 2080 hours, which is the equivalent of a full-time employee.
- $60,000 / 2,080 = $28.85 per hour.
- Now you can calculate the PTO payout: $28.85 x 45 = $1,298.25.
Communicating your PTO payout policy to staff
Whether you decide to pay out PTO or not, your decision must be part of a clearly written policy. There are numerous HR templates available that can help you write your PTO policy. Just make sure it includes the following:
- Whether the policy includes both exempt and non-exempt employees
- If both full- and part-time employees are eligible for PTO
- How PTO is accrued: Is sick time included in the accrual?
- The rate that PTO is accrued for each month of employment
- If PTO totals are rolled-over from year-to-year
- If PTO is paid out upon termination
- If there is a limit on the number of hours that can be cashed out upon termination
- If employees who are terminated for cause are eligible for PTO payout
For employers that have employees in multiple states, try to create a policy that is acceptable for each state. For instance, if you want to create a use-it-or-lose-it policy and you have employees in California, you’ll have to write a separate policy for them. The better solution is to create a policy that can apply to any of the states where you have employees.
Once the policy is in place, it should effectively be communicated to all employees. This includes reviewing the PTO payout policy with new hires, providing employees with a written or electronic copy of the employee handbook, having PTO payout guidelines written into an employment contract, and even sending monthly reminders regarding vacation policy and PTO guidelines via email, text, or through an employee newsletter.
Many states have penalties on the books for employers who fail to pay accrued PTO according to their handbook guidelines. That means that if your policy states that you pay all accrued PTO upon termination and you fail to pay an employee, the worker can often file a claim with their state labor department.
PTO is a popular perk that can be provided without complexity
Paying out PTO doesn’t have to be complicated. Establishing guidelines and adhering to any state regulations will put you on the right path to managing this important payroll function. Because PTO is one of the most requested perks among jobseekers and current employees, it can be another amenity to keep your talent pool full of top performers.