Policies related to time off, including vacation, sick and personal time, are important benefits that help increase company morale and employee wellness, while also remaining competitive with other hiring companies.
In some states, including New Jersey, employees are afforded the legal right to accrued sick leave but no federal or state laws mandate vacation time, either paid or unpaid.
I am always asked questions from business owners concerning the payment of unused time off for employees terminated or who resign.
Employers should document their company policies with clear and consistent language so that employees understand what they are entitled to receive upon termination. Taking time to explicitly spell out the policies and procedures for employees can prevent resentment and potential legal issues down the line.
Companies are able to freely decide the type of paid time off they offer to their employees. Many companies today, instead of offering vacation, sick and personal days off to employees, offer a bank of time off called PTO (Paid Time Off). This PTO bank can be issued at the beginning of the year or the company can require the employee to earn, or accrue, a certain number of days per month or hours per pay period. To add to that, companies are also legally able to limit the maximum number of vacation days an employee can accrue.
Some states require employers to pay terminated employees for unused vacation or Paid Time Off (PTO). New Jersey requires payment of unused vacation or PTO only if an employment contract or employer promise/policy to pay exists. Many companies not obligated to pay terminated employees for unused vacation or PTO do so anyway to decrease any bitterness from the exiting employee.
Unused Sick Time
Unlike unused vacation or PTO days, employers, including those in New Jersey, are not required to pay employees for accrued sick time.
Some employers however may include in their employee handbook that they will pay for unused sick time, as doing this would be an incentive to avoid abuse of their sick day policy. Additionally, an employer would have to pay for sick days not taken if contractually obligated to do so.
Unused Vacation or Leave Pay – How Payment is Determined
Employers in all states except California, Montana, and Nebraska have the right to set a date by which employees must take their accrued vacation. Employers can stipulate that employees who don’t take vacations by this date will forfeit the accumulated time-off.
However, in several states, including Massachusetts and Illinois, statutes indicate that employees must be afforded a reasonable opportunity to take accrued vacation time prior to the deadline for forfeiture.
In California, vacation pay is considered to be another form of wages and as such cannot be taken away from an employee under any “use it or lose it” scenario. If California employees get terminated or otherwise separate from their employment, they receive any accrued vacation time paid out in dollars.