July 25, 2022

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Are Employers Required to Pay Unused PTO?

Paid time off (PTO) is a standard company benefit. In the United States, there are no federal laws regarding PTO policies. Companies can choose the policy they want to offer. Common PTO policies include allotted, accrued and unlimited. Depending on state law and employment contract specifics, some employers must pay out unused PTO to employees.

PTO is a benefit that employers worldwide use to rest and recharge.

Using PTO has never been as important as it is now. Employees must fight against burnout, mental health deterioration and work-life imbalance. PTO can help with this because it allows employees to take time away from work.

Company culture plays a massive part in determining how comfortable employees are with using PTO days. Professional pressure and team reliance may make this problematic. If an employee doesn’t use their PTO, are employers required to pay unused PTO?

Paid Time Off (PTO) Defined

Paid time off, often called PTO, is the personal time employees use to receive pay when not working during regular work hours. Companies use various structures for these policies, but the PTO offerings typically depend on the company size and industry.

There are many benefits to companies offering PTO to employees. A few of the critical reasons that PTO policies are beneficial include:

  • Boosted employee morale
  • Less risk of burnout
  • Increased productivity levels
  • Appearing more desirable to top talent
  • More likely to retain employees

Most employers don’t legally have to provide PTO to employees. However, employers that have government contracts or federal contracts work under the following acts must offer PTO depending on local standards:

  1. The McNamara O’Hara Service Contract Act (SCA)
  2. The David-Bacon and Related Acts (DBRA)

States With PTO Laws

The states that have PTO laws that require employee payout in 2022 include:

  • Alaska
  • Arizona
  • California
  • Illinois
  • Indiana
  • Kentucky
  • Louisiana
  • Maine
  • Maryland
  • Massachusetts
  • Minnesota
  • New Hampshire
  • New York
  • North Dakota
  • Ohio
  • Oklahoma
  • Pennsylvania
  • Rhode Island
  • Tennessee
  • West Virginia
  • Wyoming

The District of Columbia also has PTO laws that apply to employers and local employees.

Specific states require companies to offer PTO but don’t require employers to pay employees for unused PTO. Additionally, other states have no PTO laws and leave the decisions to companies within their state.

Remote employees have special rules with PTO state laws. Employers must follow the law of the state in which the employee lives. For instance, an employee living and working in California for a company in South Dakota would still receive payment for unused PTO even though South Dakota doesn’t have this law.

How PTO Policies Vary

In standard practice, PTO policies give employees specific days or hours to use as needed. The main three types of PTO structures include:

  • Allotted
  • Accrued
  • Unlimited

Allotted PTO structures give employees specific PTO days at the beginning of a calendar year or on another day based on the employee’s hire date. An example is an employee receiving 12 8-hour PTO days per year without rolling over any days to the following year.

Accrued PTO means the employee must work a set number of hours or days to earn PTO before using it. An example is an employee who gets one hour of PTO for every 15 hours worked. After working 300 hours, the employee would have 20 hours of PTO available.

Unlimited PTO means the employee can take as much PTO as necessary. In many cases, the employer and employee do not track how many days a person takes off from work as long as they don’t abuse the policy.

Many PTO policies and structures include national holidays, paid sick leave and paid vacation. Companies may also offer paid family leave or floating holidays as part of this package.

What Is a "Use It or Lose It" Policy?

A “use it or lose it” policy refers to a rule employers implement requiring employees to use accrued PTO before the end of the year (or by a preset date).

Employees agree to forfeit any remaining PTO that goes unused with this type of policy. These employees cannot use any extra PTO in the next calendar year or cash it out.

The pros of this policy are:

  • Employees know they must use their PTO by a specific date.
  • Employees may want to take more vacations since they know they lose unused PTO.
  • Employers won’t have to pay out unused PTO if an employee leaves.

The cons of this policy are:

  • Potential employees may see this as a negative part of the company culture.
  • Employees unable to take PTO due to busy seasons at work may view this as unfair.
  • Employees may use their PTO at an inconvenient time because they don’t want to lose it.

Three states, California, Nebraska and Montana, prohibit companies from having use-it or lose-it policies.

Are Employers Required to Pay Unused PTO?

No current federal laws would require an employer to pay an employee for unused PTO.

However, if an employer states they would pay out PTO in an employment contract, they must do so when an employee leaves.

Additionally, employers must follow state laws about PTO. If the employee resides in a state with PTO laws, this supersedes the lack of federal law and means employers have to pay for unused PTO.

Key Takeaways

Are employers required to pay unused PTO?

  • PTO policies vary widely across the U.S. based on company and industry standards.
  • Certain states have specific laws dictating what type of PTO policies companies may offer.
  • Some employers must pay out unused PTO, while others have no legal requirement.

(Reporting by NPD)