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Are employers responsible for PTO payout when an employee leaves?

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HR Best Practices blog series

Navigating the world of HR can be overwhelming—period. That’s why we’ve created a blog series to answer common HR questions. To help answer each question and define best practices, we have three HR heroes with very different approaches to HR: Bythe Booke, Sam Blackheart, and Peggy Prag. You may find yourself relating to one (or more) of our heroes depending on the given situation. To see full descriptions of each character, reference our first blog of the series using this link.


Last week we covered, “Do I have to send an offer letter? Now, let’s see what Bythe, Sam, and Peggy have to say about our next question.

 Background

In the United States, 52% of workers do not fully utilize the PTO days given to them by their employers, which leaves employers with a floating balance of PTO days. What if an employee leaves before using all of his/her PTO days? Are employers responsible for paying out this balance?

 

Is there a law and/or regulation?

There are no federal laws that require employers to pay out PTO when an employee leaves. The only times an employer would be required to pay out PTO would be if the employer promised to do so in an employment contract or operated in a state that regulated PTO payout.

Check to see if your state regulates PTO payout.

Here are some questions to ask when evaluating PTO payout laws in your state:

  • 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 instance, 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, however, 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 I am not compliant?

If you are in violation of PTO regulations within your state, you 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.

Is there a risk of a lawsuit?

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 PTO payout.

 

What's the cost of compliance?

There is no cost of compliance. If an employer chooses to offer paid time off to employees, that employer simply needs to understand and comply with PTO payout regulations within their state.
 

What is the risk of bodily harm?

There is no risk of bodily harm.

 

What is the risk of negative public relations?

The risk of negative public relations is medium. Employees who feel like they’re owed something may become publicly vocal. For instance, an employee who did not receive their due PTO payout could harm the employer’s brand by making negative comments on social media and job boards.

 

What is the risk of jail time?

There is no risk of jail time.

 

What would our HR Heroes say is the best practice?

 

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 Bythe Booke: Paid time off is a form of compensation that employees shouldn’t have to forfeit upon termination. Whether it is required or not, we should pay it out when an employee leaves.

 

 

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 Sam Blackheart: Our state does not require businesses to compensate employees for unused PTO upon termination. We have a very clear “use-it-or-lose-it” policy in which we explicitly state that employees will not be compensated for any unused PTO days. It is up to the employees to use their days.

 

iStock-165967112Peggy Prag: We give PTO because we want employees to take time off. People are so busy these days - everyone needs time off to relax and de-stress from time to time. If we pay out unused PTO, we’re giving employees an incentive not to take time off. We definitely don’t want that. As long as state law allows it, let’s make it clear that our policy is “use it or lose it” and not pay out on termination, but rather foster a culture of encouraging people to take their PTO.

 

Have a question you’d like to see our heroes answer next? Let us know in the comments section below!

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