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4 Key Questions for Employers to Determine Paid Vacation and PTO Legal Obligations

June 27, 2022

The summer months have arrived and so has the annual vacation season for many Americans. Companies across the nation and in every industry will see most of their employees take some time off work between now and Labor Day.

Of course, some employers have migrated to a model of “Unlimited PTO” in which employees can ask for time off whenever they need it throughout the year. This approach has delivered mixed results, but some companies who have reported data say they have seen employee vacation days increase and overall productivity increase at the same time.

In-house counsel are on the front lines when it comes to advising their corporate management teams about how to implement whatever Paid Vacation/PTO policies they choose to offer employees. This is a delicate and complex legal issue for multi-state employers because there is no federal guidance and therefore no uniformity in determining a company’s legal obligations regarding Paid Vacation/PTO.

The U.S. Department of Labor notes: “The Fair Labor Standards Act (FLSA) does not require payment for time not worked, such as vacations, sick leave or federal and other holidays. These benefits are matters of agreement between an employer and an employee.”

However, the individual states have a lot to say on the subject.

The LexisNexis Practical Guidance team conducted a Paid Vacation and PTO State Law Survey to help address this challenge for in-house counsel. The survey covers paid vacation and paid time off laws across all 50 states plus the District of Columbia. It serves to guide employers’ practices and policies concerning vacation/PTO pay in the various jurisdictions in which the company operates.

The survey identified four central questions that employers need to ask in order to assess their Paid Vacation/PTO legal obligations:

Are there relevant state statutes on paid vacation time/PTO?

The answers here vary from states with no applicable laws (e.g., Alabama) to states such as New York, which has a detailed statute in the labor code, with a lot of nuance in between. Many states have no prevailing statute but their state courts have considered the issue and made rulings that must be understood by employers.

Is paid vacation/PTO considered wages?

State guidance on this question is not uniform and also not as predictable as in-house counsel might initially presume. In Connecticut, for example, the courts have ruled that “wages” does not include vacation pay; but in Washington, D.C., the courts have interpreted unpaid vacation pay to be considered part of an employee’s wages.

Does the state prohibit “use it or lose it” vacation/PTO policies?

Various states define “use it or lose it” policies differently, but for the purposes of the Practical Guidance survey, the researchers defined it as a policy that requires employees to use vacation within a certain time frame (e.g., within one year, prior to December 31, etc.) or forfeit the benefit. Many states have no applicable state law on this issue, but there are wide disparities in those that do have such a prohibition against employers (e.g., California) and those that do not (e.g., Illinois).

Must employers pay accrued, unused vacation/PTO at termination?

Policies concerning forfeiture of vacation time upon termination may also be regulated at the state level. In Colorado, for example, this is explicitly controlled by state law and employers are mandated to pay out all accrued vacation pay upon separation of employment. Most states have somewhat ambiguous guidance that must be carefully evaluated. Other states, such as Florida, are silent on the issue.

In addition to questions regarding Paid Vacation/PTO obligations, many states have unique requirements for private employers pertaining to wage and hour issues more generally. These resources may be useful to in-house counsel:

It’s important for in-house counsel to access timely legal research and information tools to help them navigate the patchwork of state laws and regulations governing their legal obligations with respect to Paid Vacation/PTO and other employment law matters. The Practical Guidance Labor & Employment team has prepared a brief video to help you effectively and efficiently conduct labor and employment state law research.

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