Do we have to pay out accrued PTO to terminated employees?

The answer to that question (wait for it) — it depends on the state.

A few states, like California, Colorado, Kentucky, and Massachusetts (there may be others), define “wages” statutorily to include vacation pay. And since an employer must pay all wages owed to terminated employees, generally, that includes accrued but unused vacation pay. 

Many other states, like Idaho, Mississippi, Montana, and Missouri, do not have laws clarifying that paid time off (PTO) is part of wages. 

New Jersey is another state with a law on the books requiring payout of accrued PTO upon separation of employment. 

Generally, in those states, a written agreement or policy dictates whether an employer must pay out these accruals upon separation of employment.

But even then, it may not be crystal clear.

For example, in this recent decision, the New Jersey Appellate Division had to determine whether paid time off (PTO) accrued by an employee according to an employer’s policy constitutes wages subject to the payment requirements of the New Jersey Wage Payment Law (WPL).

In that case, the employer’s policy provided for payment of accrued PTO to employees leaving employment “with proper notice of at least three weeks.” But, the same policy also states that “PTO … will not be paid to a team member whose employment is terminated in connection with a disciplinary action.”

The lawsuit arose from the employer’s decision to deny the payout of PTO to an employee terminated for disciplinary reasons. 

The court concluded that “because an employer has no statutory obligation to offer or provide PTO in the first instance, accrued PTO does not constitute wages under the WPL and is not otherwise payable until the employee satisfies the conditions precedent to payment as set forth in the policy.”

Specifically, the appellate court read the WPL to restrict “wages” only to “direct monetary compensation for the labor or services [an employee] provided.” (my emphasis). Therefore, the WPL definition must exclude “any form of supplemental incentives and bonuses calculated independently of regular wages and paid in addition thereto.” Thus, “[p]ay for hours an employee is not required to be at work for reasons such as vacation or ‘similar reasons,’ including accrued PTO, is not, by definition, compensation for labor or services actually performed.”

Your mileage may vary depending not only on where you operate but also on the form(s) of PTO, whether you offer unlimited vacation, your written policies and procedures, and the circumstances surrounding a separation of employment.

So, find a good employment lawyer and ask them.