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.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.