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Accrued PTO Payouts: Navigating Unused Vacation and Sick Days

February 13, 2024

Written by Complete Payroll

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If you’re looking to hire and retain top talent in your company, offering paid time off (PTO) is a great way to attract employees. A good PTO policy shows employees that you care about their well-being and work-life balance, as well as value them.

So, how do you navigate PTO payouts, vacation days, and sick days, all while adhering to federal and state legal requirements? Well, there is no all-around answer to ensure every business is handling their PTO legally and properly. Each state has different legal requirements for offering, handling, and PTO payouts.

To ensure you operate within your state’s legal PTO compliance, you must check your specific state laws.

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Are Sick Days and Vacation Days Paid Out Differently?

Vacation days are an allotted number of days a year that you can accrue to take paid time off. This is typically used when an employee schedules a vacation and requests time off in advance. Sick days are used when an employee has an unexpected illness or health-related absence. This type of PTO is generally taken at the last minute.

Sick pay and vacation pay can be paid out differently or in the same way. Upon termination of an employee, you will typically pay out their remaining PTO vacation time; however, it’s common not to pay out their unused sick days. This is a policy that each employer can set on their own, as there’s no federal law regarding paid sick days.

State laws vary regarding the payment of PTO days. Depending on the state of your business, you may be required to pay out unused PTO when an employee leaves, although some states consider additional factors.

What Happens to PTO or Vacation Pay When an Employee Leaves?

Two key factors determine PTO payouts upon termination. First, it depends on your state laws. There are several states where PTO payouts upon termination are a legal requirement. All though in some cases the employer still has the power to set their own policies, for example, the state of South Carolina requires companies to pay their employees for their PTO unless the employment agreement specifically states that you won’t.

Another aspect of determining PTO payouts is the timing and nature of the employee leaving your company. For example, if your employee has been with your company for under a year, then your state may not require you to pay out their accrued vacation time.

Ensure you have a clear PTO payout policy in your employee handbook and your employment contracts. Clearly stating and communicating your policy on PTO can avoid any miscommunication.

Does it Matter if My Employee Quit on Their Own or Was Fired?

If your employee left on their own accord or was fired, their PTO payouts may look slightly different. In states that require PTO payments when an employee leaves, it doesn't matter if your employee quits, is laid off, or is fired. However, employers may be able to specify in your employment contracts or employee handbook eligibility regarding PTO payouts if an employee is fired.

For employees who resigned independently and were not fired, PTO payouts again depend on the state your company is in. There are many states where it is a legal requirement that you pay a resigned employee for their PTO; however, some states do not require it.

Just make sure you clearly outline and state your PTO payout policies in your employment contracts and employee handbook. Your employees should have clear expectations and an idea of what their exit will look like. And remember, carefully follow through with your PTO policies to avoid any unpaid wages.

What if I Offer Unlimited Vacation?

Unlimited vacation is a relatively newer model where employees can take time off whenever and as often as they’d like, as long as they’re still completing all of their duties. So, with the rise of more and more companies offering a new model of unlimited vacation days to their employees, how does that affect PTO payouts?

Typically, if you’re a company that offers unlimited vacation time throughout the duration of your employee’s employment with your company, you do not have to pay out any PTO at their termination, as there isn’t vacation time that is accrued. As always, check your state laws regarding this, and feel free to contact a lawyer to learn more about this specific situation within your state.

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PTO and sick leave payouts vary based on state laws and employer policies. A clear procedure for employee departures ensures smooth payouts. Contract policies must be uniform and understood to avoid disputes. Research state laws and establish a clear PTO policy. Follow legal requirements for PTO, sick days, and payouts for terminated employees.

If you have questions regarding unused vacation and sick days, please contact Complete Payroll for personalized advice on the best PTO payout structures for your company.


DISCLAIMER: The information provided herein does not constitute the provision of legal advice, tax advice, accounting services or professional consulting of any kind. The information provided herein should not be used as a substitute for consultation with professional legal, tax, accounting, or other professional advisers. Before making any decision or taking any action, you should consult a professional adviser who has been provided with all pertinent facts relevant to your particular situation and for your particular state(s) of operation.

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