Monday, March 18, 2013

Paying employees for accrued vacation upon termination—Yay or Nay?

One of the questions clients most frequently ask me is whether they have an obligation to pay employees for accrued, unused vacation days at the end of their employment. My default answer always is, “It depends. What does your handbook or vacation policy say?”

Under Ohio law, the default rule is as follows.

  • If an employer has no policy under which an employee forfeits unused vacation time or other paid time off at the end of employment, an employer must pay out any unused time.
  • If, however, an employer has a clear policy providing that paid vacation time or other paid time off is forfeited on resignation or discharge, then an employer is not obligated to pay out any unused time upon termination.

What does a policy look like that entitles an employer to withhold accrued, unused vacation time or other paid time off as a forfeiture at the end of employment? The employer in Broadstock v. Elmwood at the Springs (Ohio Ct. App. 3/15/13) [pdf] had the following policy:

When a team member leaves Elmwood, all accrued vacation time is paid to the end of the last pay period provided the team member requests the pay; a two (2) week notice is given and fulfilled; an exit conference has been conducted; all items (keys, uniforms, badges) have been returned; and the team member has not been terminated. (Emphasis added.)

According to the court, the employee handbook clearly stated that accrued vacation is forfeited to an employee upon termination. The employee was terminated. Therefore, the court held that the she was not entitled to her accrued vacation time.

To me, however, such as policy is draconian and overbearing. Instead, consider limiting vacation and other paid time off forfeitures to “for cause” terminations. In that case, you won’t benefit employees who lose their jobs because through their own misconduct, but you also won’t be punishing employees who lose their jobs through no fault of their own (i.e., downsizing, restructuring, etc.).