Employees must receive final pay in accordance with federal and state law when their employment ends. These laws generally dictate when final pay must be provided, how it must be delivered, and what the payment must include. In many cases, final pay may include accrued, unused vacation or paid time off (PTO). Below, we answer frequently asked questions about final pay and vacation/PTO payout.
KEY POINTS
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Q: When is final pay due?
A: Under federal law, final wages generally must be paid by the next regular payday, but many states require final pay sooner. In some cases, this time frame differs depending on whether the employee initiates separation (voluntary termination) or the employer initiates separation (involuntary termination).
Here are two examples:
- California: The state requires final pay immediately for involuntary terminations. For voluntary terminations, California requires final pay within 72 hours. However, if the employee provides at least 72 hours of notice, final pay is due on the employee's last day.
- Texas: For involuntary terminations, final pay is due within six calendar days of termination. When an employee quits or resigns, they must be paid in full no later than the next regularly scheduled payday after the effective date of the resignation or retirement.
Some states have separate final pay deadlines and other rules for commissions, bonuses, and other special situations.
Q: Do I have to pay employees for unused vacation when they leave? What if I combine all leaves into a single PTO bank?
A: It depends on your state and company policy. States often distinguish between vacation and sick leave. In many states, a general PTO bank is treated like vacation for the purposes of payout at the time of separation.
States generally handle the payout of unused vacation and PTO in one of three ways:
- Required: Employers must pay employees for accrued, unused vacation/PTO time at the time of separation;
- Policy-Dependent: Employers can exclude unused vacation/PTO time from final pay only if they have a written policy that explicitly states that employees will not be paid for any accrued, unused time upon separation; or
- No Specific Rule: Employers can exclude accrued, unused vacation/PTO from final pay absent a policy or practice that indicates otherwise.
Q: What are some states that require the payout of vacation at the time of separation?
A: Here are several examples of states that generally require payout of accrued, unused vacation, and in some cases PTO, at separation:
- California
- Colorado
- Illinois
- Louisiana, if vacation/PTO is earned or otherwise due under the employer’s policy or terms of employment
- Massachusetts
- Maine*
- Montana (according to the attorney general)
- Nebraska
- North Dakota**
- Rhode Island***
* In Maine, paid vacation accrued on or after January 1, 2023, must be paid when employment stops unless the employee works for an employer with 10 or fewer employees, a public employer, or a collective bargaining agreement supersedes the rule.
** In North Dakota, payout of accrued vacation is required if the employee leaves involuntarily and for many voluntary separations. However, if an employee leaves voluntarily, no payout is required if, at the time of hiring, the employer provided the employee written notice of the limitation on payment of accrued paid time off; the employee has been employed by the employer for less than one year; and the employee gave the employer less than five days’ written or verbal notice of their intent.
*** In Rhode Island, payout of accrued vacation is generally required for employees who have completed at least one year of service.
Q: What are a few examples of states that have a policy-dependent law?
A: Here are three examples.
In Maryland, if an employer informs employees in writing at the time of hiring that unused vacation will be forfeited upon termination, the employer may exclude it from final pay, according to the Maryland Department of Labor. However, if the employer lacks a written policy limiting payout of accrued leave, the employee is entitled to the cash value of any unused, earned vacation that was otherwise usable.
In New York, employers must pay departing employees for unused vacation upon separation unless they have language in a written employment agreement or employer policy notifying employees that they forfeit such vacation pay upon their termination of employment, according to the New York Department of Labor.
North Carolina takes a slightly different approach. The state requires all vacation policies to address, among other things, the conditions under which vacation pay will be forfeited upon discontinuation of employment. The law also states that ambiguous policies will be construed against the employer and in favor of employees.
Check your state law for details.
| Employer Tip: Employers with employees in a policy-dependent state should make sure their vacation/PTO policy clearly explains how time is earned, whether unused, accrued time is paid at separation, any caps or carryover limits, and whether different rules apply to vacation, sick leave, and PTO. |
Q: Do I have to pay employees for unused sick leave at the time of termination?
A: Most sick leave laws don't require employers to pay employees for unused sick leave at the time of separation. Remember, if you bundle all leave into a single PTO bank, your state may apply the same rules as it does for vacation, and require you to pay out unused sick leave as well. Check your applicable laws.
Conclusion
Before processing a final paycheck, review applicable state law, the employee’s separation type, any written vacation/PTO policy, applicable wage agreements, and whether commissions, bonuses, expense reimbursements, or other payments are owed. Failure to provide final pay in accordance with applicable laws may result in penalties. Develop policies and procedures to help manage your compliance.
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