Part One: Mandatory Leave Payout and Its Relationship to Traditional “Use-It-Or-Lose-It” Policies

Bob decides the grass is in fact greener at another company, and resigns. Carla is fired for insubordination. Dan wins the lottery and quits without notice. Each now is demanding payment for accrued but unused paid vacation leave. While they worked for you in three different states, you thought this would be a one-answer-fits-all situation, because your organization’s “use-it-or-lose-it” policy applies across the board. Well, you might be wrong.

Whether your “use-it-or-lose-it” policy will apply depends upon the law of the state and the language of your policy.

In this post, we focus on those states that require employers to pay employees for accrued, unused vacation leave - in other words, states that forbid “use-it-or-lose-it” at the end of employment. Several of these states also have different twists on “use-it-or-lose-it” practices during employment, which prevent employees from carrying over all unused leave from one year to the next. In our next post, we will explore some of the more nuanced state-specific requirements for vacation leave payout, when the language of your policy is key.

No state requires an employer to provide paid vacation leave. Bob, Carla, and Dan have no automatic entitlement to vacation days. But once an employer grants this benefit, it may be obligated to pay the employee for the accrued but unused leave when the employment relationship ends.

Assume that our trio of former employees had the good fortune to accrue a maximum of two weeks of vacation per year, but also the misfortune of work obligations that prevented them from using it. (At her departure, Carla, thoroughly disgruntled, muttered about something called a “work-life balance,” but no one paid her any attention.)

So what must an employer do in such circumstances? The states of California, Colorado, Illinois, Massachusetts, Montana, and Nebraska require you to pay up. You must pay the departing employee for all accrued but unused vacation leave at the conclusion of employment, regardless of the reason that the employment relationship has ended. In these states, an employee has “earned” such days, in the same way he or she has earned wages, and must be compensated accordingly. If Bob has accrued five of the ten vacation days allotted to him under the company’s vacation policy when he resigns mid-year in California, you must pay him for those days. For all of Carla’s stamping and storming about, you must also pay her for the two days she accrued during the calendar year in Massachusetts, ill will notwithstanding.

However, even states that mandate vacation leave payout may condition it on particular requirements. If you had employed Dan in Rhode Island for only six months when he won the jackpot, there is no need to pay him, because only those employees who have worked for a year are entitled to payment. In North Dakota, the requirements are even more specific; an employer need not pay a voluntarily departing worker for vacation leave if it has employed him for less than one year, as long as (1) the employer provided the employee with written notice notifying him of the one-year limitation at hiring, and (2) the employee has given less than five days’ notice before voluntarily separating from the company. Thus, if you failed to provide Dan with a written leave policy containing the limitation in North Dakota, you will be on the hook for his accrued but unused vacation days, despite Dan’s failure to provide the company with adequate notice.

Keep in mind that, in several of these states, a prohibition on the loss of accrued paid time at the separation of employment may not necessarily prohibit an employer from instituting what is traditionally termed a “use-it-or-lose-it” vacation policy on a yearly basis for those workers who remain employed with the company.

According to an advisory document issued by the state attorney general, Massachusetts employers, while prohibited from applying “use-it-or-lose-it” at the end of employment, may apply this practice to require employees to use their accrued vacation leave by a certain period of time or lose all or a portion of it. This is the case as long as the employer (1) provides adequate prior notice of the policy to employees, and (2) ensures that the employees have a “reasonable opportunity” to use the vacation time within the period identified.

Similar policies are also permitted in Illinois. Colorado, in the news for its recent move to prohibit vacation leave forfeiture at the conclusion of employment, seems to have something of a hybrid approach. The most recent guidance from Colorado’s Department of Labor and Employment is that “use-it-or-lose-it” policies are permissible, provided that (1) the employer and employee enter into an agreement to that effect, and (2) the policy does not deprive an employee of vacation pay that is “earned,” leaving the agreement to define when such pay is “earned” during the calendar year.

These states require individualized attention when you craft your policies. In our next post, we will address what you need to know outside of these states, where “use-it-or-lose-it” is more likely to be enforceable.

More to follow…