Upon Separation of Employment, Is an Employee Entitled to a Payout for Unused Vacation or Paid Time Off?

With the holidays in tow and the year nearing its end, many employees may find themselves checking in on how much vacation time or paid time off (PTO) they have left to use or, depending on company policy, carry over to next year. But what if an employee resigns or is terminated from their job – does the employee get a payout for unused vacation days or PTO? This article examines what an employee in New York may be legally obligated to receive.

Before answering the question, it’s important to note that federal law does not even require employers to provide employees with paid or unpaid vacation leave.[1] Both the U.S. Department of Labor and the Fair Labor Standards Act (FLSA) have left matters of vacation leave at the discretion of the States to develop any applicable laws.[2]

Neither New York’s legislature nor its courts have definitively settled whether an employer may implement a policy holding that employees are required to forfeit accrued vacation time after separation from employment regardless of the reason for the separation. However, an employer may implement a policy preventing employees from collecting payment for accrued vacation time if they fail to comply with specific and previously disclosed company requirements, such as providing two weeks’ notice.[3] Similarly, while some states have restricted employers’ discretion to maintain “use it or lose it” vacation policies designed to prevent employees from seeking cash payouts in lieu of taking vacation days, New York has left it to the discretion of employers. Such policies require employees to forfeit unused vacation days they have accrued after termination or resignation and, in New York, can be legally enforced provided that the policy was adequately disclosed to the employee. [4]

However, if a company does have a policy or employment agreement which provides that it will pay for unused accrued PTO or vacation time, then it must do so under New York law.[5] New York courts have upheld that such previously established agreements essentially constitute the rule book when it comes to determining how much, if any, PTO or vacation-based payment an employee is entitled to receive after separation from their employment.[6] Further, in the absence of a written forfeit policy, or any policy regarding what happens to vacation pay after separation from employment, under New York law the employer is obligated to provide pay for the unused accrued vacation time.[7] Failure to do so could constitute a violation of Article 6 of the New York Labor Law and entitle an employee to collect not only the vacation or PTO pay, but double the amount, including liquidated damages, as well as attorney fees if a legal action seeking to obtain the compensation is successful.

Employers should be thoughtful in proliferating vacation and PTO policies, and ensure that the policies are adequately disclosed to their employees. Similarly, employees should carefully review and evaluate their employers’ vacation and PTO related policies prior to the year’s end and in connection with any change in employment status.

This article is intended as a general discussion of these issues only and is not to be considered legal advice or relied upon. For more information, please contact RPJ Partner Ethan Krasnoo who counsels clients in areas of complex commercial litigation, arbitration, mediation and dispute resolution, and employment, intellectual property, and entertainment and media. Mr. Krasnoo is admitted to practice law in New York, the United States District Courts for the Southern and Eastern Districts of New York, the United States Court of Appeals for the Second Circuit and United States Tax Court. Attorney Advertising.