Often employers will neglect or overlook revising their vacation and/or paid time off policies, which are buried in the employee handbook that was last revised a half-dozen years ago. For many, this is a big mistake. 

Depending on your jurisdiction, a poorly drafted vacation/PTO policy can carry significant potential liability. If a company’s vacation/PTO policies are unclear or, worse, there are no such policies, its employees may be able to claim they are entitled to payment for their accrued but unused vacation upon termination.

For example, in New York, if there is no clear statement that accrued but unused vacation/PTO time is forfeited upon termination, employees can potentially claim payment for all accrued but unused vacation/PTO. In addition, the company may be left unable to “correct” (i.e. take away) already accrued vacation/PTO time payable under these policies. 

In other jurisdictions, policies that deny payment for accrued vacation/PTO may be prohibited altogether (e.g. California). Employers must also be cautious of the interplay of state and local paid sick (or other) leave laws in order to ensure any legally required leave does not become payable upon termination.

What should you do? 

First, it is important to know your state and local laws regarding vacation/PTO/paid leave accrual, usage, and payout. Next, you should review all prior versions of your vacation/PTO policies to determine what exactly has been provided and whether or not you can correct those policies retroactively. 

In jurisdictions that allow it, vacation/PTO policies should be revised and tailored as much as possible to prevent the excessive accrual and payout of vacation/PTO upon termination and reduce the company’s potential liability.

Offer severance, not automatic PTO payouts 

Some companies believe in their business judgment that it is beneficial to provide some form of economic payout to departing employees, ostensibly rewarding them for years of loyal service. This is admirable, however, automatic vacation/PTO payouts reward both good and bad employees alike.

As an alternative, offering severance, and conditioning it upon the signature of a general release agreement, is a better course of action. This allows the company to retain discretion over how much will be paid to each departing employee depending on the circumstances and also helps limit potential legal claims.

General releases do not eliminate all claims, but they go a long way and certainly help us attorneys get a good night’s sleep.

Leonard is an associate at Fox Rothschild who focuses on a range of employment litigation matters. 

This material is intended for general information purposes only. It does not constitute legal advice. The reader should consult with knowledgeable legal counsel to determine how applicable laws apply to specific facts and situations. This material is based on the most current information at the time it was written. Since it is possible that the laws or other circumstances may have changed since publication, please contact an attorney to discuss any action you may be considering as a result of reading this publication.

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