What Happens to PTO When an Employee Quits or Is Fired?

First, let’s set the stage: one of your employees comes to let you know they are leaving for another job and are giving their two-week notice… Opens in a new window to cedrsolutions website…

Being the forward-thinking, ninja-HR-skills manager that you are, you ask for their notice in writing because you’ve learned how important it is to document an employee’s resignation in their own words. Maybe you even provide them with this free Voluntary Resignation Form… Opens in a new window to cedrsolutions website… , since you’ve already got it handy.

Then you start getting the rest of your HR ducks in a row… Opens in a new window to cedrsolutions website… :

• You decide whether to honor the notice or let them go early… Opens in a new window to cedrsolutions website… .
• You get in touch with your insurance provider to determine the proper protocol for terminating health benefits coverage and providing a COBRA notice.
• You determine whether or not you will be able to continue seeing your former employee as a patient and draft a letter if you can’t.
• You set a reminder to turn off all access to your systems on the appropriate day.
• You make sure you understand your obligations under state law when it comes to the timing of the final paycheck… Opens in a new window to cedrsolutions website… and what things must be included.
• You prepare an exit interview form… Opens in a new window to cedrsolutions website… to issue with the employee’s final paycheck… Opens in a new window to cedrsolutions website… .
• And you prepare a “confirmation of resignation letter” detailing the above items and reminding them of ongoing confidentiality obligations pursuant to HIPAA and any previously signed confidentiality agreements.

Of course, as HR nerds, we would be remiss if we didn’t mention that it’s essential to work with a qualified HR expert… Opens in a new window to cedrsolutions website… to make sure you get the all of the little details right when it comes to any employee separation, including delivering that final paycheck… Opens in a new window to cedrsolutions website… to your employee in accordance with state and local laws, but we digress.

Note: One of the most common mistakes we see in employee handbooks… Opens in a new window to cedrsolutions website… is those that contain policies that do not comply with your state’s labor laws. Things like holding final paychecks in exchange for returning property, refusing to pay out unused time in exchange for something else, or simply saying PTO is forfeited at termination can violate many state and local laws.

Just as you’re getting ready to wrap up preparations for this employee separation, you notice something you didn’t expect: your departing employee hasn’t used any of their time-off benefits for more than a year, and, as a result, they’ve accrued several weeks of vacation time and a week of sick leave.

That’s a lot of unused time off! But what are you supposed to do with it?

Do you have to pay out all of that PTO when the employee leaves?

This is a question that comes up a lot in the HR Solution Center… Opens in a new window to cedrsolutions website… and our HR Base Camp Facebook Group… Opens in a new window to cedrsolutions website… , and it’s easy to understand why. Your office provides PTO as a benefit to be used incrementally –a week here, a few days there –and you generally wouldn’t expect the use of that time to cause your payroll costs to spike all at once, which is exactly what happens when you end up paying an employee for the time they spent working PLUS several days worth of PTO in one lump sum.

Paying out unused PTO when an employee leaves can feel like a major (and costly) burden, especially since you know that employee won’t be providing any additional benefit to your practice moving forward. But, as with pretty much everything we cover in these HR Tuesday posts, whether or not you have to pay for that time upon separation comes down to two things:

1. what the laws in your state have to say about this topic and
2. your company policies on the matter.

The Legal Side

There are no federal laws that specifically address PTO and say it has to be paid out upon separation.

Many states, on the other hand, can be very specific about what has to happen with PTO upon separation. This includes whether that time is considered “earned wages” –meaning it must be paid out –or if it is viewed as discretionary payment –meaning that employees may lose that time if it is not used at the time of separation.

These laws often treat sick time and vacation time differently, as well. This means that, in many cases, one form of time off, vacation leave, will have to be paid out when an employee leaves your practice and other types of time off, sick time, will not have to be paid. When this is the case, you’ll need to be careful to ensure that you aren’t bundling multiple types of time off into a single category unless you intend to pay out for ALL employee PTO upon separation (more on this shortly).

This is one more reason why it’s important to work with a qualified professional… Opens in a new window to cedrsolutions website… that has a firm grasp of the state and local laws that apply to your business when it comes time to write your policy or help you calculate the correct payment.

In the rare instances where there are no laws dictating what you have to do with an employee’s vacation, sick, or other forms of PTO when they leave, the way you deal with PTO upon separation comes down to what your employee handbook policies have to say on the matter.

The Policy Side

If there are state or local laws in place that stipulate what to do with an employee’s PTO upon separation, then your employee handbook policies… Opens in a new window to cedrsolutions website… need to reflect the letter of the law. Even if your policies are in conflict with the laws in your state, you are still obligated to follow the laws. Plus, having illegal policies… Opens in a new window to cedrsolutions website… in your handbook can present other issues for your business in the long term.

Note: Another common mistake we see made in many employee handbooks… Opens in a new window to cedrsolutions website… is that the policy writer is not an HR professional, per se, and does not understand the impact their words or decisions have on other policies. One paragraph may say that the yearly vacation benefit is granted at the start of the year. In another section, they say that vacation payout is prorated based on how much was accrued.

When you present a judge with conflicting policies, no matter your intent, a judge will see the “granting” language and tell you that you can’t have it both ways. If you set a reasonable expectation through your words that the time was “granted”, then that is what you’re stuck with.

If there are no laws governing whether or not PTO must be paid, then it’s generally up to your discretion whether or not you pay for that time.

In both cases, your employee handbook policies need to explicitly state how PTO will be handled when an employee resigns or is terminated. Some state laws actually say that, unless the handbook explicitly says otherwise, unused PTO must be paid out. Make sure that your office’s employee handbook is up to date and customized for your business… Opens in a new window to cedrsolutions website… by an HR expert to ensure it’s in compliance with all of the laws that apply to you and that it reflects your business’ preferences wherever possible.

When laws don’t mandate that PTO be paid out upon separation, you will need to be careful not to back yourself into a promise of payment that you never intended to make.

It’s not uncommon for these types of promises to be made inadvertently. For instance, if you used a handbook template you found on Google, a DIY handbook builder, or are using a “one-size-fits-all” employee handbook for your office that was provided by your payroll company rather than having your handbook customized… Opens in a new window to cedrsolutions website… for your practice, you may well have a policy in place that forces you to pay for PTO without even realizing it.

Bundling vacation and sick time into a single PTO policy can become a problem. If your state requires you to pay out one type of PTO (e.g., vacation time) but not another type (e.g., sick time), but you “bundle” all of them into a single PTO model, you may be forced to pay out the entire balance upon separation where you otherwise might not have been required to. Or, if your handbook wasn’t customized for your office by a qualified professional, it may state that PTO will be paid out even though you aren’t required to offer that payment at all. Or, worse yet, your handbook could say that PTO won’t be paid out even though your practice is required by law to pay for certain types of PTO when an employee leaves.

Phew! We get it. It’s enough to make your head spin.

This is where having the right systems and support in place is key. Your handbook policies should be tailored to comply with the laws in your state and to reflect your practice’s preferences where laws don’t govern what you can and cannot do. Your timekeeping software… Opens in a new window to cedrsolutions website… should also be customized to track different types of leave separately in accordance with applicable laws and your handbook policies… Opens in a new window to cedrsolutions website…   (note: both customizable timekeeping software and a custom, compliant employee handbook are included when you become a CEDR Member… Opens in a new window to cedrsolutions website… ).

Conclusion

While there is no federal law dictating what you must do with an employee’s PTO when they leave your practice, many states and localities do have such laws in place. These laws vary widely and can differ based on the type of leave in question, whether the employee resigned or was terminated, and other factors.

Whether or not you have to pay out PTO upon separation depends on what your local laws say. If there are no laws that apply to you that say what to do with an employee’s PTO when they leave, then it is generally up to your discretion. Either way, you will need to have a custom policy in your employee handbook… Opens in a new window to cedrsolutions website… that outlines exactly what happens with each type of PTO you offer when an employee resigns or is terminated.

It’s important to work with a qualified HR professional… Opens in a new window to cedrsolutions website… to get this policy right. It’s all too common for employers to rely on generalized policies that are either out of compliance with local laws or that make a promise of payment that you simply don’t have to make.

Separating the various time-off benefits you offer into the proper “buckets” (vacation, sick, etc.) can help prevent PTO payouts that could easily be avoided. This can be accomplished with a combination of properly written policies… Opens in a new window to cedrsolutions website… and the help of a customizable timekeeping system… Opens in a new window to cedrsolutions website… that keeps track of time off as it accrues per local laws and your office policies, both of which CEDR provides as part of Membership… Opens in a new window to cedrsolutions website… .

All this being said, if you’re wondering what to do with an employee’s PTO when they leave, take a close look at the laws in your state, city, and county, as well as the PTO policies in your handbook before you face your next employee separation. Getting on top of this policy now could literally save your practice tens-of-thousands of dollars over the course of a few years.

Want to know how your handbook holds up from a compliance standpoint? Have it evaluated by an HR expert for free!… Opens in a new window to cedrsolutions website…