There’s no federal or state law that says you have to offer employees paid vacations or paid time off (PTO).

But for most organizations to stay competitive, it’s a necessity. In the last few years, there’s been a fast-rising trend for employees to claim they’re owed money for unused time when their employment ends.

Vested benefit

While paid vacations and PTO aren’t legally required benefits, it’s a different ballgame once you offer such benefits. There are a host of laws – mostly at the state level – that address what happens with unused time.

In many cases, courts are ruling it’s a vested benefit and must be paid. The most publicized recent case – a class action suit against Target by 270,000 California employees – cost the company $10 million to settle.

But employees in several other states have also cashed in, with major cases pending in Illinois and Washington. In the majority of cases, the dispute centers around an employer’s use-it-or-lose-it policy.

Under these policies, employees typically can’t cash in unused vacation or PTO when they leave the company.

In some states, most notably California and Illinois, there are laws severely limiting employer rights. Meanwhile, the Nebraska Supreme Court ruled that even if an employee handbook clearly says vacations are use-it-or-lose-it, employers have to pay upon termination (Roselund v. Strategic Management, Inc.).

Other states such as Florida and Texas currently favor employers, but that could change as the trend grows.

Employers have won some battles. The Minnesota Supreme Court decided vacation policies are a contract between employers and workers (Lee v. Fresnius Medical Care). In plain English, that means if you got sued in Minnesota, the wording of your policy and the clarity of your employee handbooks would be the deciding factors in the case.

PTO could present problems

Nowadays, many employers save money by lumping vacation days into a single PTO bank with sick pay, personal days, bereavement and other types of paid leave.

But here’s the problem: Even though termination pay for unused sick days and other non-vacation leave are rarely covered by state vacation-pay rules, they may be protected when the days count as all-purpose PTO.

Courts have mixed views on whether employees are entitled to reimbursement for all unused PTO or merely the “vacation portion” of it.

With the rise of PTO policies in place of separate leave, a host of states are considering whether to amend vacation-pay laws or to leave interpretations up to the court system. Meanwhile, some experts recommend organizations with PTO  consider going back to separate vacation and sick banks.

Tags: Leave, paid time off, sick leave, vacation