Do employers need to pay employees for accrued vacation time upon termination? This is a question without a simple answer, and one that has been heavily litigated over the past several years. Unlike most wage and hour issues, the Fair Labor Standards Act does not address this concern. Rather, the payout of vacation time has been left to the states to regulate, and as can be expected, the results have widely varied. Below is a brief overview of the different ways in which states have handled the payout of overtime:
• Employees must be paid for all unused, accrued vacation time at the time of termination (California, Colorado).
• Employees will be paid for vacation time upon termination unless the employer has a written policy stating otherwise (Iowa, Indiana).
• Employees will be paid for accrued vacation time depending on the employer’s written vacation policy and/or procedures (New Jersey, Pennsylvania).
Based upon the varying state rules regarding vacation pay, employers need to carefully assess whether their vacation pay policies are permissible. In particular, employers should consider whether the applicable state law permits the company to restrict the payout of accrued vacation time. As stated in an earlier posting, “it is probably better to err on the side of conservatism in these matters (i.e. allowing payout) rather than risk a class action where the costs of defending and the possible costs of paying the plaintiffs’ legal fees will geometrically increase the payouts that otherwise would have been mandated.”