Must Accrued Vacation Time Be Paid Upon Termination?

Do employers have to pay out the wage equivalent of the accrued vacation time for an employee upon termination? Does the answer depend on whether the employee quits or is terminated for cause? Does the answer depend on whether the employee belongs to a union?

Before we answer these questions, first let’s look at vacation laws in general. Under U.S. law at the federal level, vacation time is not mandatory. Even the Fair Labor Standards Act, which mandates minimum wage and overtime payments, does not have a provision for paid vacation. This means employers can offer as much or as little paid and/or unpaid vacation time as they see fit.

While there are several laws relating to paid and unpaid leave, none specifically mandate that employees be given a certain number of paid vacation days. However, most employers do offer paid vacation as a standard benefit for full-time employees. The amount is typically minimal, with many employers offering two weeks.

Given that vacation time is not mandated by law, but is common, what happens to that accrued time when an employee is either terminated or resigns?

What You Need to Know About Paying Out Accrued Vacation Time

The full answer regarding the payout of accrued vacation time actually depends on what state you’re doing business in. State and local laws vary, and this is one area where state laws are often more specific than federal. Around half of all U.S. states do have laws that require employers to pay out accrued vacation. Some states legally mandate that accrued vacation be treated the same as wages and thus it is required to be paid out immediately upon termination in accordance with final paycheck laws. Therefore, the first thing to do is to check state and local laws for guidance.

If you’re doing business in a state that does not legally mandate that accrued vacation be paid out upon termination, then what happens? At the federal level, the short answer is that an employer is obligated to follow its own policies and agreements with employees. In other words, if the vacation policy states that it will be paid out upon termination, then the employer has a self-imposed obligation to do so. Choosing otherwise could raise questions or even result in a lawsuit if the reason for the withholding appears to be illegal—should an employer opt to not follow its own stated policies or contracts, the primary concern would be the appearance of discrimination or retaliation. However, the employer’s policies can include any provisions that are deemed appropriate. For example, the employer could draft a policy that says vacation accrual payouts are not paid if an employee is fired for cause or gives less than 2 weeks’ notice.

Another aspect to consider is whether or not the employee in question was covered by any contract, collective bargaining agreement, or union terms. If there is any type of contract in place, then the agreements contained therein will answer this question. It may surprise you to know that the existence of a contract or union agreement does not always guarantee that vacation accrued must be paid, but, just like the situation with company policies, if it’s something that was conveyed to employees by the employer, then it must be followed.

It should also be noted that an employer cannot unfairly deduct vacation time (before or after the termination decision) for any leave that was taken in accordance with other employee rights. For example, if an employee takes a legally protected leave and later resigns, the employer cannot opt at that point to deduct the leave days from the vacation accrual. This is especially a concern at the state level since state laws often provide more leave requirements than federal law.

Last but not least, even if none of these items apply, employers should be sure to assess their past practices. If there is an established practice of paying out accrued vacation to terminated employees, it would be risky to stop this practice or to implement it inconsistently. Doing so could raise red flags and open the door to claims of discrimination or retaliation, so ensure all cases are handled in a careful and consistent manner.

*This article does not constitute legal advice. Check your state and local laws before making any decisions. State and local laws also may include regulations on “use it or lose it” policies and other caps on vacation accruals. Ensure that you understand these laws and consult counsel if necessary.

About Bridget Miller:

Bridget Miller is a business consultant with a specialized MBA in International Economics and Management, which provides a unique perspective on business challenges. She’s been working in the corporate world for over 15 years, with experience across multiple diverse departments including HR, sales, marketing, IT, commercial development, and training.