Being fired from a job can be an overwhelming and emotional experience, filled with feelings of anger, frustration, anxiety, and confusion. The sudden loss of employment often brings with it a host of uncertainties, including what will happen to any banked paid time off (PTO) you’ve accumulated. While it’s challenging to see the silver lining in such a moment, understanding your rights regarding vacation payout can provide some clarity and a small sense of control in an otherwise chaotic situation.

In this article, we’ll explore what happens to employees’ banked assets once they lose their jobs, any federal and state laws that dictate the process, whether it matters if you leave willfully or are fired, and more. 

Is Vacation Pay Required By Law in the U.S.?

Understanding your rights when it comes to vacation payout starts with knowing the legal landscape. Is vacation pay required by law in the U.S.? No, vacation pay is not mandated by federal law. The Fair Labor Standards Act (FLSA), the primary authority on labor laws, does not require employers to pay for time not worked, such as vacation days, sick leave, or holidays. Instead, these benefits are typically negotiated between employers and employees.

Surprisingly (or perhaps not surprisingly), the U.S. is one of the only advanced economies in the world that does not guarantee its workers paid holiday and vacation days.

While vacation days are not required by law, many employers view them as critical pieces of their compensation packages. More than 75% of small business employees have access to PTO for sickness, vacations, and holidays. 

Per the U.S. Bureau of Labor Statistics, private sector workers average 15 paid vacation days after five years of service. After 10 years of service, that number rises to 18 days. For employees with 20-plus years of service, the average number of paid vacation days is 20. In the public sector, after five years, workers average 16 vacation days; after 10 years, workers receive 19 days off; and after 20 years, employees are privy to 22 vacation days. 

When I Quit My Job, What Happens to My Vacation Time?

If you've accrued PTO time as an employee, what happens to it when you quit your job? Whether your company has to pay out that PTO depends on various factors, including state and local laws, company policies, and the nature of your departure.

In some jurisdictions, employers are required to pay out unused vacation time, while, in others, whether a payment is made is solely up to the employer. That said, some states enforce use-it-or-lose-it policies, which dictate that unused PTO or vacation time simply expires if it is not used by a specific deadline, limiting what employers can or can't do. 

Which U.S. States Require PTO Payouts Upon Termination?

The fate of unused, accrued PTO time often falls on employee’s geographical location. Some states require the employer to pay the employee, while other states do not have any rules. 

Let's take a closer look at each state's regulations, limitations, and exceptions for vacation payout.

California: Accrued vacation is the same as earned wages in California. Thus, employers are required to pay employees any unused vacation time upon termination, regardless of the cause of separation. Employers are prohibited from implementing a use-it-or-lose-it policy. 

Colorado: If an employer offers PTO, it has to be paid out when an employee leaves his or her job, regardless of the reason for the separation. Sick days are not eligible to be paid out. Also, an extended furlough does not qualify as a separation, thus, a payout is not required in the wake of an approved absence. 

Illinois: Accrued vacation days must be paid out if and when an employment separation occurs, regardless of the reason. Sick days do not count in this equation. The state does allow use-it-or-lose-it policies, which allows employers to decide whether or not to allow carryover of unused vacation time each year.   

Indiana: Vacation pay is considered as deferred compensation in place of wages in Indiana. Thus, a company decides if an employee is paid his or her vacation time upon a separation. And, the company is legally bound to follow its policy. 

Louisiana: Vacation time must be paid out upon separation in Louisiana. Forfeiture of earned vacation time at termination is not permitted. 

Maine: Vacation time counts as wages earned in Maine. As of 2023, unused accrued vacation time may not be forfeited unless the company employs 10 individuals or less or is a public entity. 

Massachusetts: Employers must pay out accrued vacation time. Employers may utilize a use-it-or-lose-it approach, but it must be spelled out in a company’s handbook. 

Nebraska: Vacation pay is a fringe benefit in Nebraska, though the state does require employers to pay out vacation time upon termination. Nebraska prohibits a use-it-or-lose-it approach. 

North Dakota: Employers are required to pay out unused vacation time to employees upon termination, including resignations, in North Dakota. Employers may utilize a use-it-or-lose-it policy if it's clearly stated in their handbooks. There are some exemptions. An employer may revoke payment following a separation if a written notice is issued by the employer at the time of hiring. Also, if the employee has less than one year of tenure, the employer may withhold unpaid vacation time. Finally, if an employee is issued less than five days of notice before a separation, unpaid vacation pay may be withheld. 

Rhode Island: Vacation time is considered wages after an employee has achieved one year of tenure. State law does not regulate use-it-or-lose-it policies. 

States Without Mandatory Vacation Payout

Several states don’t require PTO payouts, leaving companies to determine their own policy. This means the employment agreement the company create will determine whether unused PTO is paid out when the employment relationship ends. These states are:

States With No PTO Payout Regulations

Some states don’t have any rules regarding the fate of unused vacation time. These include: 

Employee Rights Regarding Vacation Payout

When an employee leaves a job, an employer is required to distribute a final paycheck for all of the work the employee performed before the separation. As previously mentioned, federal law does not require employers to provide paid vacation time to workers or to pay out unused vacation at the end of employment.

If an employer isn’t appropriately paid for vacation time as required by law or the employer's policy, an employee may consider sending the employer a letter requesting vacation pay and/or filing a wage claim with the state’s labor department. 

Each state has unique consequences for employers who fail to comply with PTO payout laws. For example, in Arkansas, the employer is required to pay within seven days of the employee's final day or be held liable for double the amount. In California, an employer that does not pay final wages (including vacation time) can be held liable for the amount as well as 30 days of wages payable at the employee’s standard rate. Further restitution may also levied. In Indiana, an employer can be held liable for 10% of unpaid wages, per day (up to two times the amount of the unpaid wages). 

There are several lawsuits alleging employers have failed to appropriately pay out PTO to employees following a separation. A wage-and-hour class action complaint filed in Santa Clara County Superior Court in April alleges that Amazon violated state labor and business codes by failing to pay earned vacation and paid time off after employees separated from the company. Another case, filed in October 2023, alleges Bank of America did not pay out unused vacation time when employees left the company. 

If an employee finds himself or herself in this situation, it’s important to look up the statute in his or her state to ensure rules are being followed appropriately. 

OnTheClock Is Here to Help

OnTheClock makes managing time and payroll a breeze. With our easy-to-use app, your team can request time off, check how much vacation they’ve built up, and see how much they’ve got left — just like that! 

Here are several ways OnTheClock can optimize the management of employee PTO and ensure employees are paid appropriately upon a separation. 

Accurate Time Tracking: OnTheClock's precise time tracking records hours worked as well as accrues vacation time based on company policies. Employees can easily track their vacation balances in real-time, ensuring transparency and accuracy.

Customizable PTO Policies: The platform allows employers to set up and customize their PTO policies, including vacation accrual rates, carryover rules, and maximum limits. This customization ensures vacation time is tracked according to the company's specific guidelines.

Real-Time PTO Balance Monitoring: Employees and managers can view vacation balances in real-time. This transparency helps prevent discrepancies and ensures that both parties are aware of available vacation time. Employees can plan their time off, and employers can monitor accruals to ensure accuracy.

Automatic Accrual Calculations: OnTheClock automatically calculates vacation time accruals based on the rules set by the employer. This automation reduces the likelihood of human error and ensures vacation time is consistently and correctly accrued.

Detailed Reporting: The platform provides detailed reports that track all aspects of vacation time, including accruals, usage, and remaining balances. These reports are essential for both payroll processing and ensuring that any remaining vacation time is accurately paid out upon termination.

Integration with Payroll Systems: OnTheClock integrates seamlessly with various payroll systems, ensuring all accrued and used vacation time is reflected accurately in the payroll process. This integration helps ensure that employees receive the correct payout for any unused vacation time upon termination.

Termination Procedures: When someone leaves their job, OnTheClock can create a final report that shows the vacation time they’ve earned and used. This report helps to make sure the employee gets paid the right amount, according to the company’s rules and the law.

Audit Trails: OnTheClock maintains an audit trail of all PTO transactions, including accruals, approvals, and payouts. This trail provides a transparent record that can be reviewed to resolve any disputes or verify that the correct procedures were followed.

Compliance with State Laws: OnTheClock can help ensure compliance with state laws regarding vacation payout by allowing employers to configure settings according to local regulations. This ensures that the company is following the law when it comes to paying out vacation time upon termination.

OnTheClock is a workforce management tool poised to save you hundreds of hours in operational efficiency, leading to thousands of dollars saved. The best news: OnTheClock can be sampled for free. Try it out today for 30 days at no cost and learn why 160,000-plus individuals use OnTheClock to maximize their time each and every day. For more information, visit www.ontheclock.com.