Often employers will neglect or overlook revising their vacation and/or paid time off (PTO) 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.
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. As always, we suggest speaking to legal counsel about any contemplated practices in order to ensure they are implemented lawfully and effectively.