Tuesday, August 2, 2011

Must employers pay unused vacation at termination? It depends.

One issue that often arises with employees is whether they should be paid out unused vacation pay at the end of employment. Because Ohio law considers vacation pay a deferred payment of an earned benefit, an employer generally cannot withhold accrued vacation pay at the end of employment (just like it cannot withhold wages from a final paycheck). Unlike wages, however, because this benefit is deferred, an employer can implement a policy under which an employee forfeits unused vacation days.

Thus, the rule for vacation pay is as follows:

  • If an employer does not have a policy pursuant to which unused vacation time is forfeited, and if the employee has unused, accrued vacation time, he or she is entitled to be paid for that time.
  • If, however, the employer has a clear written policy, set forth in a manual, handbook, or elsewhere, providing that paid vacation time is forfeited on resignation or discharge, an employer may withhold unused vacation pay.

Do you want to know what such a policy looks like? A recent Ohio appellate decision—Majecic v. Universal Devel. Mgmt. Corp. [pdf]—provides the following example:

Paid Time Off (PTO) includes sick, vacation, … and personal time off with pay…. Employees will be given PTO days after one year of employment…. All unused PTO will be forfeited upon an employee’s resignation or termination.

Two thoughts to leave you with:

  1. Despite this recent judicial guidance, and as with all employment policies, it is best to check with your employment counsel before rolling out a vacation pay forfeiture policy to your employees.
  2. Notwithstanding the ability to implement a vacation pay forfeiture policy, think about whether such a policy makes for sound HR practice, or whether it makes more sense to limit this policy only to “just cause” terminations, if at all.