Are Employers Required to Pay Out PTO When an Employee Leaves?
In the United States, 52% of workers do not fully utilize their allotted PTO days, which leaves many employers with a floating balance of unused time off. What if an employee leaves before using all of their PTO days, are employers responsible for paying out this balance?
Are Employers Required by Law to Pay Out PTO When an Employee Departs the Company?
There are no federal laws that require employers to pay out PTO when an employee leaves. However, there are state laws that establish PTO payout requirements. In other words, employers are only required to pay out PTO if they promised to do so in an employment contract or operated in a state that regulated PTO payout.
When evaluating PTO payout laws in your state, consider the following questions:
- How much unused PTO do I have to pay out? Your state may require full payout, no payout, or partial payout of unused PTO upon termination.
- If I have remote employees working in different state than my company headquarters, which state’s PTO payout laws apply? An employer is only responsible for paying out PTO if the terminated employee resides in a state that requires it. For example, consider an employer living and working from home in California and employed by a company headquartered in Tennessee. California requires employers to pay out unused PTO; Tennessee does not. Because the employee resides in California, California law would apply and the employer would be responsible for paying out PTO to the remote employee.
- What pay rate do I use when calculating PTO payout? Some states require employers to pay out PTO at the employee’s rate of pay upon termination. Others allow employers to pay out PTO at the rate of pay at the time the PTO was accrued. Why does the pay rate matter? An employee may earn more money at the time of termination than they had at the time they accrued the PTO, which can affect the amount an employee is owed.
What Happens if an Employer Isn't Compliant?
If an organization is in violation of state PTO regulations, the employer will be held to the legal standards of that state. These may vary. If an employer commits to PTO payout in an employment contract, but fails to pay out PTO upon termination, contract law standards would be used to evaluate the case.
There is no risk of a lawsuit unless the employer previously promised to offer PTO or if the employer terminates a remote employee who resides in a state that regulates time off payouts. If an employer chooses to offer PTO to employees, that employer simply needs to understand and comply with payout regulations in its state.
Audit Your PTO Policy to Save Money, Stay Competitive
PTO policies require regular review for companies to remain competitive, compliant, and financially solvent. Whether completely reworking your organization’s time off benefits or simply tweaking here and there, HR should consider regular audits and updates to the organization's PTO policy.
Use the following template to communicate any changes to your time off benefit.
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