Does unused vacation time get paid out in the event of a termination of employment?
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UPDATED: Jul 16, 2021
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Most states do NOT require payout of unused vacation on termination of employment as a matter of law. Rather, unused vacation is only paid out if and to the extent that there is something in writing requiring payout, in accordance with the terms of either a written employment contract or a written employment handbook which requires this payout. So, if there is no written policy or agreement requiring payment of unused vacation at the end of employment, the employer doesn’t need to pay it.
Does unused but accrued vacation have to be paid out on termination of employment? Since we live in a system with two distinct legal jurisdictions (state and federal), there is no always-true, one-size-fits-all answer. Rather, there is a general answer, which is true for federal purposes and for any state which has not modified the rules by passing state legislation changing your entitlement to vacation pay. The following answer can therefore be treated as the “default” or generally true answer, BUT you have to check the laws in your state to see if there are specific laws affecting vacation pay.
The United States is an “employment at will” nation. This means, first and foremost, that there is no right to be hired or to have a job. Rather employers decide who to hire, how long to retain employees, and when to terminate them. (Of course, employees can also decide to quit any time they like; that is also part of “employment at will.”) A consequence of “employment at will” is that employers decide on pay and benefits. Just as there is no right to a job in the first place, there is no right to any particular compensation for working, beyond the fairly minimal standards of requiring that all jobs pay at least minimum wage and that non-exempt jobs pay overtime in some situations (e.g. when working more than 40 hours in a weeks). There is no other guaranty of or regulation of compensation for working, including benefits.
In particular, there is no right to vacation time and no obligation on employers to provide paid vacation hours or days. Employers would be free to have no vacation. If they choose to offer vacation, they have complete discretion over its terms and conditions: e.g. how much employees get, how they accrue it, whether it carries or rolls over if not used in the year it was earned, etc. All aspects of vacation policy are under the control of employers—and that includes payout policy.
Just as there is no right to vacation in the first place, there is no intrinsic right to be paid out for unused vacation when employment ends. In the absence of some affirmative policy by the employer to pay out unused days, unused vacation is not paid out—that is, the norm or default is to not pay out accrued but unused vacation days. Employers only need to pay out unused days if there is something in writing requiring it. (It must be in writing, since an oral promise or policy statement is subject to change at will under “employment at will”—the employer can go back on or renege on it any time they want.)
If the employee has a written employment contract guarantying him a payout of vacation (including a union or collective bargaining agreement), then it must be paid. If not, the employee could take legal action (e.g., sue) to enforce the contract and get the money coming to him or her.
Or if there is an absolutely firm written policy, such as in an employee handbook, requiring payout, that written policy can effectively create an enforceable agreement requiring payment. But as stated, it must be a firm policy—any limitations, restrictions, caveats, etc. in the employee handbook can let the employer avoid paying.
The above is the general or default rule. Certain states have passed laws requiring the payout of unused vacation time. Contact your state’s Department of Labor for information about your rights.