Can We Policy ‘Unused Vacation Time’ in our Employee Manual?

Private employers are not required to offer their employees vacation time under federal or state law. However, once a private employer does offer its vacation time as a form or type of benefit, an issue may arise as to whether the employer must pay its employee for earned but unused vacation time when the employee leaves or is terminated.

Several states, such as California, Montana, and Nebraska, consider vacation time in the same manner as they consider “wages”. In California, for example, vacation time is a “wage” that is earned as work is performed. And since earned wages can never be withheld or forfeited for any reason, earned vacation cannot, in these states, be lost or forfeited due to separation of employment – the earned vacation time must be paid to the employee upon termination or separation of employment. Likewise, in these sates, an employer cannot have a policy prohibiting earned and unused vacation time from rolling over year to year.

Other states, like Ohio, New York and North Carolina, also treat vacation time as wages. But these states permit employers to create “use it or lose it” vacation policies that limit or alter the obligation to pay vacation time when an employee separates employment. Employers in these states are also permitted to create policies that indicate that earned vacation will not roll over from year to year. Stated another way, in these states “use it or lose it” policies can be created indicating earned but unused vacation will be forfeited at termination and/or will not roll over from year to year – so long as the policy is clear in that regard.

Many states have no statutes that address the obligation to pay unused vacation upon termination of employment. Employers in these states are also permitted to create “use it or lose it” vacation policies as they deem appropriate – including plans or policies that provide that earned vacation will not roll over from year to year and that no earned vacation pay will be paid to an employee once the employee separates employment with the employer.

In an Employee Manual, a sample “use it or lose it” vacation policy could state, in pertinent part:

Any vacation time not used during the calendar year in which it was credited will be forfeited as of December 31 – the Company will not “cash out” or pay any employee for unused vacation time. Unused vacation will not roll over from year to year. Upon termination or separation of employment, the employee shall not paid for any accrued but unused vacation time.

(Note that the above sample policy is general in nature and for illustrative purposes only. Employer must carefully draft its own policies to comply with the laws of its state in which it does business. And such policy must be created to meet the employer’s specific needs.)

Or course, any vacation plan or policy must be carefully drafted, as once a vacation plan or policy is offered or made available to employees, the employer will be bound to comply with the terms of the plan or policy as written. And given the potential pitfalls that can arise with improper drafting of a vacation policy (or consistent administration of that policy among employees), many employers, not withstanding the ability to implement “use it or lose it” plans or policies, simply decide to pay employees the earned vacation upon separation – doing so eliminates potential wage claim issues.

Notwithstanding the ability to implement a “use it or lose it” policy as explained above, or where such policies are not permitted by state law, some employers create a more complex type of vacation plan in order to avoid payment for earned vacation time upon separation of employment. These employers create policies that provide for periodic “earning” of vacation time.

These types of vacation plans or policies meet every state’s rules and regulations, as they establish “when” an employee earns vacation time. Because if vacation time is earned only as the employee performs his or her work (or earned in fractional increments over a period of a calendar year), potential exposure or liability for payment of unused vacation time is reduced upon an employee’s separation. Even in those states that prohibit “use it or lose it” policies, employers must pay employees only for vacation that is earned. Unearned vacation time is never required to be paid to the employee when separation does occur. So if an employee only earns vacation time as work is performed, the obligation to pay vacation time at separation is reduced or eliminated.

Note that these types of policies can be quite complicated and require constant “hands on” administration. And the language used in such policies must be very carefully drafted.

An example of such a policy is as follows:


Vacation is available to all eligible full-time employees. Vacation is earned each pay period and can be used in XX (X) hour increments. Vacation accrues starting at the conclusion of the employee’s 90-day probationary period and is based on the following accrual schedule:

Yrs. of Service | 1 Pay Period | 26 Pay Periods
0 – 2 Yrs. | 1.54 Hours | 40 Hours (5 days/1 week)
3 – 10 Yrs. | 3.08 Hours | 80 Hours (10 days/2 weeks)
11+ Yrs. | 4.62 Hours | 120 Hours (15 days/3 weeks)

Assumes 40 Hour Work Week and Bi-Weekly Pay Schedule

On January 1 of each year, the Company will credit vacation time for each employee based on years of service with the Company (breakouts listed above), and the amount of time so credited will be available for use immediately. For new employees, the Company will credit each employee with an annual pro-rated portion of the above allotted amount of vacation at the conclusion of an employee’s 90-day probationary period. Although the vacation time is credited as of January 1, it is not earned until such time as the employee actually works the weekly period(s). If an employee exhausts his or her available vacation time, any subsequent absence will be unpaid and could be considered unexcused. Unexcused absences could result in both disciplinary action and could affect your eligibility to participate in any Company bonus plans.

A request for vacation time must be made in advance. Supervisors must receive at least XX day(s) notice for each day of vacation that is requested. If workload permits, a supervisor has discretion to authorize vacation with less notice. By the same regard, the supervisor may require more notice due to business needs. Every effort will be made to honor a vacation request, however business demands or requests of employees in advance of yours and or the workload may require you to select different dates or reduce the number of consecutive days you are requesting.

In those states where “use it or lose it” is permitted, the following can even be included:

Vacation not used during the calendar year in which it was credited will be forfeited as of December 31. Unused vacation cannot be rolled into the following year, nor will it be “cashed out” or paid to any employee. Upon termination or separation of employment, employees with accrued, unused time will receive a payout for the appropriate amount (i.e. determined by the number or pay periods actually worked prior to separation) if the following expectations are met:

• Payment will be made for accrued, unused vacation.
• Payment will be made only after the employee returns all Company property in his or her possession.


Vacation payment issues can be complicated and they vary from state to state. Significant liability to an employer can result if vacation pay is not properly administered.

Remember, the information is this article is NOT intended to be considered legal advice, nor is it to be relied upon as such. Any questions regarding the need to pay unused vacation, or the viability of any specific vacation pay policy, should be directed towards a competent attorney.