Employers generally are not required by law to pay departing workers for unused leave benefits — accumulated sick leave, for instance. Instead, companies set their policies individually: Employees should check the company handbook or their employment contract to see whether they should expect to be paid for their unused time.
This article by TELG former principal Tom Harrington (Ret.) and TELG managing principal R. Scott Oswald was published by SHRM.org on December 10, 2014.
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When they leave a company, many employees are shocked to learn that their employer is not required to pay them for their unused leave benefits. Whether an employee is entitled to sick leave, vacation leave or paid time off (PTO) benefits varies from state to state, and often from employer to employer. Leave benefits and associated payouts depend largely on the policies and rules in an employer’s handbook or employment contract.
No federal law requires an employer to provide an employee with sick leave, vacation leave or PTO; and there is thus no federal law governing leave payouts. Some states, though, have passed legislation governing leave benefits, such as requiring employers to provide employees with sick leave. Ultimately, an employee’s entitlement, if any, to a leave payout upon separation turns on the employer’s handbook or employment contract; whether the leave is classified as sick, vacation or PTO; and, in some cases, applicable state laws.
Sick leave and vacation leave are self-explanatory and well understood. PTO is a somewhat recent and less-understood development in which employers combine sick and vacation leave into one benefit.
Generally, contract law governs whether an employer is required to pay sick leave, vacation leave or PTO when an employee separates from the company. This means that an employee’s entitlement to a leave payout, if any, depends on the employer’s written policies, if any, and whether the employer effectively communicated the policies to the employee. Employers usually set out these policies in a company handbook or employment contract.
In some states, courts have interpreted PTO and vacation pay to constitute wages, thus holding that an employer is required to pay an employee for any unused PTO or vacation leave he or she has accrued upon the discharge or separation.
State courts have generally held that sick leave is a benefit an employer is not required to pay at termination because it is only an applicable benefit if an employee gets sick. If an employee has unused sick leave at the time of separation, the employee is not entitled to a sick leave payout because he or she is not sick.
Maryland and Virginia do not require employers to provide employees with paid or unpaid sick leave. In 2008, Washington, D.C., passed the Accrued Sick and Safe Leave Act, D.C. Code Section 32-131.02, which requires all employers to provide paid leave to employees who have been employed for at least one year and have worked at least 1,000 hours during the previous twelve months. Under the statute, the minimum amount of leave an employer must provide depends on the size of the employer’s workforce.
Employers in Maryland, Virginia and Washington, D.C., are not required to provide paid or unpaid vacation leave to employees. Any employee entitlement to vacation benefits or a payout of such benefits upon separation is determined by the employer’s policies or employment contract and is governed by contract law.
In 1981, the D.C. Court of Appeals, in deciding whether employees were entitled to a payout of unused leave, cited the general rule for sick leave payouts in D.C. and many other jurisdictions: “An employee who accrues but does not take vacation or other paid leave is entitled to monetary compensation for that leave upon discharge from employment, absent an agreement to the contrary.” The case is Nat’l Rifle Ass’n v. Ailes, 428 A.2d 816, 820 (D.C. 1981) (citing Jones v. Dist. Parking Mgmt. Co., 268 A.2d 860, 861-62 (D.C. 1970)). The court held that (1) the right to accrue paid leave implies the right to compensation for unused leave upon separation; and (2) the employee is entitled to compensation for unpaid leave unless the employer sustains the burden of proving “an agreement to the contrary.”
A 2011 Maryland District Court case applied the same contract law principles as those cited in the National Rifle Association case. The Maryland District Court held that based on its reading of the employee’s employment contract, the employee was entitled to accrued and unused vacation and sick leave up through the date of her termination. This case is Giddens v. Core Partners Inc., No. CIV. JKB-10-3357, (D. Md. July 18, 2011).
These two cases illustrate the general rule that leave payouts are governed by express agreements between the employer and employee, typically in such formats as an employee handbook or employment contract.
Although laws and court interpretations vary between jurisdictions, the general principle that contract law applies to leave payouts is widely accepted. Entitlement to a leave payout will generally be governed by the employer’s handbook or employment contract. Employees should not simply expect a payout for their unused leave benefits as they prepare to separate from their employer. An employee should first review the employer’s handbook and employment contract (if applicable). These documents will likely tell the employee whether he or she is entitled to a payout.
