For many employers, vacation and other paid time off (PTO) are key benefits for recruiting and retention, enabling employees to relax, reduce stress, improve mental health, and return to work refreshed and recharged. To a degree, employers have latitude in determining eligibility, amount and accrual of these benefits. Employers should exercise caution, however, when addressing use-it-or-lose-it provisions and the treatment of unused accrued paid leave on employment separation in vacation policies. Many state laws limit vacation forfeitures.
No state currently requires employers to offer paid vacation, although two states — Maine and Nevada — require certain employers to provide paid time off that employees can use for any reason. For employers voluntarily providing paid vacation, state wage-and-hour laws often fail to specify whether the employer must pay out unused accrued vacation on employment separation or can implement a use-it-or-lose-it policy that requires forfeiture of vacation not used by a specified date — typically, by the end of a calendar year. Depending on the state, employers must navigate a maze of regulations, court rulings or other guidance to clarify these issues. In many states, employers may dictate the terms of vacation policies, as long as the policies are in writing and clearly communicated to employees. Most states consider PTO that has no special designation to be vacation.
Two recent developments in Colorado and Maine illustrate the mix of court rulings and state laws that employers must track when crafting vacation policies.
In 2021, the Colorado Supreme Court ruled that employers must pay all earned vacation on separation from employment and any forfeiture provision was void (Nieto v. Clark's Market, Inc., 2021 CO 48). The court analyzed the Colorado Wage Act (CWA) (CO Rev. Stat. §§ 8-4-101 to -125). That law generally defines wages and compensation as “earned, vested, and determinable” and expressly includes “vacation pay” provided under the terms of any agreement as protected wages or compensation.
In response, the Colorado Department of Labor and Employment (CDLE) revised its wage protection rules (7 CO Code Regs. § 1103-7-2.17) to clarify that this nonforfeiture prohibition extends to any accrued paid leave, including vacation. The regulation allows employers’ vacation agreements to contain provisions detailing:
As a result, employers may have policies that cap employees’ vacation pay accruals to one year or some other limit, but cannot require forfeiture of any accruals earned.
The rules broadly define vacation pay as “pay for leave, regardless of its label, that is usable at the employee’s discretion (other than procedural requirements such as notice and approval of particular dates), rather than leave usable only upon occurrence of a qualifying event (for example, a medical need, caretaking requirement, bereavement, or holiday).” For more details on these developments, see Colorado high court bans use-it-or-lose-it vacation policies (Nov. 30, 2021).
After enacting a law requiring earned paid leave for any reason, Maine later addressed vacation payout on employment separation (26 ME Rev. Stat. Ann. § 626). Effective Jan. 1, 2023, all unused paid vacation must be paid on cessation of employment, except for:
This law creates some uncertainty. Under the Maine Earned Paid Leave (MEPL) law and its regulations, a covered employer does not need to pay out unused accrued paid leave on separation, unless the employer’s policy requires doing so. Whether the recent amendment requiring payout of “unused paid vacation accrued pursuant to the employer’s vacation policy” includes unused MEPL is not clear. For more information on the MEPL law, see Maine’s earned paid leave begins accruing Jan. 1, 2021 (Nov. 12, 2020).
The chart below lists states that require payout of unused vacation time on employment separation and identifies for each whether a use-it-or-lose-it provision in a paid vacation policy is prohibited:
States requiring payout on employment separation |
Use-it-or-lose-it provision prohibited? |
Citations |
California |
Yes |
CA Lab. Code §§ 201(a) and 227.3; Dep’t of Indus. Rel. FAQs; Suastez v. Plastic Dress Up, 647 P.2d 122 (1982) |
Colorado |
Yes |
CO Wage Act; 7 CO Code Regs. § 1103-7-2.17; Nieto v. Clark’s Market, Inc., 2021 CO 48 |
Illinois (see note below) |
No |
820 IL Comp. Stat. §§ 115/5, 300.520(e) and (f)(3); and IL Lab. Dep’t FAQs |
Iowa |
Unclear |
IA Code §§ 91A.2 and 91A.4 |
Louisiana |
No |
LA Rev. Stat. § 23:631(A) and (D); and Wyatt v. Avoyelles Parish Sch. Bd., 831 So. 2d 906 (2002) |
Maine |
Unclear |
|
Massachusetts |
No |
MA Gen. Laws Ch. 149 § 148; Elec. Data Sys. Corp. v. Att’y Gen., 907 N.E.2d 635 (2009); Att’y Gen. Advisory 99/1 |
Montana |
Yes |
Langager v. Crazy Creek Prods., 954 P.2d 1169 (1998); Att’y Gen. Opinion No. 56, Vol. 23 (1949); MT Dep’t of Lab. & Indus. FAQs |
Nebraska |
Unclear |
Fisher v. Payflex Sys. USA, Inc., 829 N.W.2d 703 (2013); NE Rev. Stat. § 48-1229; NE Lab. Dep’t FAQs |
North Dakota |
No |
ND Cent. Code § 34-14-09.2; ND Admin. Code § 46-02-07-02(12); ND Lab. Dep’t FAQs |
Rhode Island |
Unclear |
RI Gen. Laws § 28-14-4(b) |
Note: An Illinois bill called the Paid Leave for All Workers Act (SB 208) — currently pending with the governor — may create confusion regarding the current law on vacation forfeitures. SB 208 requires payout of unused paid leave (which can be taken for any reason) on employment termination only if the leave time is credited to the employee’s PTO bank or vacation account. However, SB 208 confirms that this requirement does not limit employee rights under the state’s wage payment laws. Further clarification may be needed.
In most states other than those in the chart above, an employer’s policy or employment contract governs whether earned unused vacation is paid on employment separation and/or forfeited if not used by a specified date. Some states specifically require payout of vested vacation on employment separation and generally allow the terms of an employer’s vacation policy to dictate whether vacation vests.
Federal law does not mandate paid vacation, unless an employer agrees to provide vacation as part of a federal contract. Federal contractors subject to rules under the Davis-Bacon and Related Acts and the McNamara-O’Hara Service Contract Act have to provide a minimum amount of fringe benefits, including paid vacation. Employers must pay out any unused accrued vacation that qualifies as a bona fide fringe benefit before the earliest of these dates:
Establishing a uniform policy is challenging for multistate employers. Employers in states prohibiting use- -or-lose vacation provisions may want to explore capping accruals. For example, a policy could limit accruals to 80 hours so employees reaching that limit cannot accrue additional time before using some of the vacation already earned.
Additional actions for employers designing or reconsidering a vacation policy could include:
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