Can an employer take away earned PTO?

Paid Time Off or PTO cannot be taken away or forfeited when the pay accrues as earned. An employer is prohibited from taking away earned vacation time to punish you.

Author: Brad Nakase, Attorney

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An employer is not required to provide paid time off under California vacation law. However, paid vacation is considered earned wages and cannot be taken away or forfeited. An employer may not rescind employees’ accrued PTO once the employees earn vacation hours.

Employees typically earn paid leave (PTO) over time as they work. “Accrued” time off is earned leave that has not yet been used. An employee has the right to do the following with accrued PTO:

  • Use it by taking time off or going on vacation
  • Cash it out by accepting a check in lieu of time off
  • Roll it over into the next year
  • Give it up

Normally, employees decide what to do with unused PTO at the end of a calendar year. But their decision might depend on the employer’s specific policies or even their state’s laws.

Use-It-Or-Lose-It Policy

An employer taking away earned PTO through a use-it-or-lose-it policy is illegal. California law bans use it or lose it vacation policies. A use-it-or-lose-it employee vacation policy generally requires that employees forfeit their unused vacation time if not used by a specific date.

If a company enforces a use-it-or-lose-it policy, employees are required to use their PTO by a certain date or else give up their right to it. This type of policy prevents an employee from cashing out or rolling over unused time.

Employers who enforce this type of policy must make sure that is clearly expressed to their employees. To refer to the above example, Cassidy was obviously not made aware of her company’s use-it-or-lose-it policy and suffered the consequences. Her employer should have made sure Cassidy and other employees were aware of the PTO policy.

While use-it-or-lose-it policies may save an employer the cost of paying out employees who don’t use their PTO, it can also frustrate employees who wanted to save their PTO for the next year or receive cash instead.

Importantly, use-it-or-lose-it policies are illegal in certain states.

Accrued PTO

An employer may not take away accrued PTO. The accumulation or increase of paid time off hours over time. Accrued time off is PTO that someone earns over time. Accrued time off is time off an employee has earned but has yet to use. If an employer offers PTO as part of an employment package, they usually define how time off is earned. PTO can be calculated by hours worked, days worked, weeks worked, or pay periods worked.

State PTO Payout Laws

States have different laws regarding how PTO is managed. Some states might regulate unused vacation time by requiring employers to:

  • Payout unused vacation time to employees or rollover unused time to the next year (effectively banning use-it-or-lose-it policies)
  • Pay unused PTO as wages in an employee’s final paycheck
  • Both of the above

Many states allow use-it-or-lose-it policies. These states include Pennsylvania, Virginia, Georgia, Florida, Texas, Iowa, Missouri, Louisiana, Mississippi, New Mexico, Arizona, Oregon, Washington, New York*, and Illinois*. This means that in the above states, employees who do not use their PTO by a certain date, such as the end of the calendar year, could lose their earned PTO entirely.

*with exceptions

The states that have laws banning use-it-or-lose-it policies include California, Montana, Wisconsin, West Virginia, Colorado, Wyoming, and Nebraska. In these states, PTO is considered a form of wages. Therefore, if an employee in one of these states does not use a portion or all their PTO, the employee should receive either a payout, rollover, or be allowed to forfeit the time off. Specific laws depend on the state in question, but all agree that employers who offer PTO cannot simply cancel an employee’s earned time off.

For both employers and employees, it is important to know the relevant state laws.

Example: Heidi lives in Virginia and works for a deli selling honey-baked hams. She doesn’t have enough money to go on vacation this year, so she doesn’t feel the need to use her PTO time. In June, Heidi decides to quit her job. She has five days of paid vacation time accrued and, since she hasn’t used it, would like to be paid their value in her final paycheck instead. Heidi’s boss denies her request, because in Virginia, employers do not have to provide PTO payout at termination.

Example: Derek lives in Colorado and works for a recreation company that sells outdoor equipment. Derek is saving up his paid vacation days for a February trip to the Alps with his girlfriend. In December, a couple months before his trip, Derek learns that he must use his PTO before the new year, when it will be cancelled. Upset, he learns that his employer has a use-it-or-lose-it policy, where all unused PTO expires on December 31. Derek does his research and discovers that Colorado has a law banning use-it-or-lose-it policies. He hires a lawyer and sues his employer.

California law

In California, employers are prohibited from having a use-it-or-lose-it policy. Employers can, however, have a cap on how much time is earned.

Under California law, PTO is considered a form of wages and any unused PTO time must be paid out to an employee in their final paycheck upon termination.

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