Vacation Payout Laws by State
Last Updated: January 6th, 2026
Vacation and PTO Payout Requirements by State
This is where it gets even more complex. Some states treat accrued vacation as earned wages that must be paid out. Others leave it entirely to company policy.
States That Require Vacation/PTO Payout
These states treat accrued vacation time as earned wages. If you offer vacation, you must pay it out at termination:
| State | Payout Required? | Use-It-or-Lose-It Allowed? | Government Source |
|---|---|---|---|
| California | Yes, always | No (prohibited) | CA DIR Vacation FAQ |
| Colorado | Yes, always | No (prohibited) | CO CDLE INFO #3E |
| Illinois | Yes, if policy provides | Yes, with notice | IL DOL Vacation FAQ |
| Indiana | Yes, if policy provides | Yes, with notice | IN DOL |
| Louisiana | Yes, if policy provides | Yes, with notice | LA LWC |
| Maine | Yes, if policy provides | Yes, with adequate notice | ME DOL |
| Massachusetts | Yes, always | Yes, with adequate notice | MA AG Vacation Advisory |
| Montana | Yes, always | No (prohibited) | MT DLI |
| Nebraska | Yes, always | No (prohibited) | NE DOL FAQ |
| New Mexico | Yes, if policy provides | Yes, with notice | NM DOL |
| North Dakota | Yes, unless written policy says otherwise | Yes, with written notice | ND DOL |
| Rhode Island | Yes, after 1 year of employment | Yes, with notice | RI DLT |
| Wisconsin | Yes, if policy provides | Yes, with notice | WI DWD |
States Where Company Policy Controls
In these states, employers are not required to pay out unused vacation unless their own policy promises it. However, if your policy does promise payout, you must honor it:
Alabama, Alaska, Arizona, Arkansas, Connecticut, Delaware, Florida, Georgia, Hawaii, Idaho, Iowa, Kansas, Kentucky, Maryland, Michigan, Minnesota, Mississippi, Missouri, Nevada, New Hampshire, New Jersey, New York, North Carolina, Ohio, Oklahoma, Oregon, Pennsylvania, South Carolina, South Dakota, Tennessee, Texas, Utah, Vermont, Virginia, Washington, West Virginia, Wyoming, District of Columbia
Critical point: Even in these states, if your employee handbook or employment agreement promises vacation payout, that promise is enforceable. Courts consistently treat written policies as binding contracts.
Personal Time, Floating Holidays, and PTO Banks: What Gets Paid Out?
This is one of the most misunderstood areas of payroll compliance. Here's what you need to know:
The General Rule
The name you give a benefit doesn't determine whether it must be paid out. What matters is how the benefit actually works:
- If time can be used for any reason at the employee's discretion → It's likely treated as vacation and must be paid out in states that require vacation payout
- If time can only be used for specific qualifying events (illness, bereavement, specific holidays) → It's likely not required to be paid out
Floating Holidays: The Hidden Trap
Colorado's official guidance is explicit: "Floating holidays are vacation pay if usable any day employees select, subject to ordinary vacation scheduling/approval."
This means if your floating holiday policy allows employees to take the day whenever they want for any reason, it's functionally vacation—and must be paid out at termination in states like California, Colorado, Massachusetts, and Nebraska.
California's Division of Labor Standards Enforcement (DLSE) has similarly stated that paid leave provided without condition is presumed to be vacation, regardless of what the employer calls it.
Massachusetts includes "holidays" in its definition of "wages" under the Massachusetts Wage Act. According to Steffans Legal, floating holidays may be required to be paid out at termination depending on how the policy is structured.
How to Structure Floating Holidays to Avoid Payout
If you want to avoid paying out floating holidays at termination, your policy must tie them to specific events:
Example of a policy that likely requires payout:
"Employees receive 2 floating holidays per year to use at their discretion."
Example of a policy that likely does NOT require payout:
"Employees receive 1 floating holiday to be used on or near their birthday, within 2 weeks of that date."
The second policy ties the benefit to a specific event that may not occur before termination. The first policy is functionally vacation by another name.
Combined PTO Banks
If you combine vacation, sick leave, and personal days into a single "PTO" bank, many states treat the entire balance as vacation that must be paid out. This is explicitly the case in:
- California
- Colorado
- Illinois
- Massachusetts
- Nebraska
Nebraska's guidance is clear: "Should the employer have a combined PTO policy (vacation and sick), all accrued but unused paid time off is due to the employee as wages."
The States That Will Cost You the Most
If you're late on final paychecks or fail to pay out required vacation in these states, the penalties can be severe:
California
California's waiting time penalties are notorious. For each day you're late (up to 30 days), you owe the employee a full day's wages at their regular rate.
Example: An employee making $300/day who gets their final paycheck a week late could be owed an additional $2,100 in penalties—on top of the wages owed.
California also prohibits any forfeiture of earned vacation. Your policy cannot condition payout on giving notice, being terminated for cause, or any other event after the vacation was earned.
Source: California Labor Code Section 203
Massachusetts
Massachusetts allows employees to recover triple damages for willful violations of final pay requirements. That $2,000 final paycheck you were a week late on? Now it's potentially $6,000.
The Massachusetts Attorney General's Advisory on Vacation Policies explicitly states that employers cannot require employees to forfeit earned vacation as a condition of resignation or termination.
Source: MA Attorney General's Vacation Advisory
Colorado
Colorado recently strengthened its penalties. Under the 2021 Colorado Supreme Court ruling in Nieto v. Clark's Market, employers can now owe the greater of $1,000 or 125% of the unpaid wages.
Colorado's Division of Labor Standards and Statistics has also issued explicit guidance that floating holidays are vacation pay if usable any day employees select. This guidance, updated May 2024, makes Colorado one of the strictest states for floating holiday compliance.
Source: Colorado INFO #3E
Oregon
Oregon mirrors California with up to 30 days of penalty wages, plus the employee can recover attorney's fees. Oregon requires immediate payment upon involuntary termination—by the end of the next business day.
Source: Oregon BOLI
Illinois
Illinois requires payout of earned vacation upon separation and provides that employers cannot withhold earned vacation because an employee failed to give notice or was terminated involuntarily.
Source: Illinois DOL Deductions FAQ
Common Mistakes to Avoid
1. Assuming "next regular payday" means you have weeks
In states like California, Colorado, Massachusetts, Missouri, Montana, Nevada, Oregon, and Utah, terminated employees must be paid immediately or within 24-72 hours. "Next regular payday" only applies to employees who quit in many of these states.
2. Forgetting about accrued vacation in mandatory payout states
In California, Colorado, Montana, and Nebraska, earned vacation cannot be forfeited under any circumstances. You must pay it out regardless of how the employee left or what your policy says.
3. Calling it something other than "vacation" to avoid payout
The name doesn't matter. "Personal days," "PTO," "floating holidays," and "annual leave" are all treated as vacation if they can be used for any purpose at the employee's discretion.
4. Not accounting for remote workers
Your company might be in Texas, but if your employee works from California, California's rules apply. Multi-state compliance is where most payroll teams get tripped up.
5. Waiting to deduct disputed amounts
Some employers delay final paychecks while sorting out equipment returns, expense advances, or other deductions. In most cases, you cannot withhold an entire paycheck over a disputed deduction. Pay what's undisputed on time, and pursue the rest separately.
6. Having a combined PTO policy without understanding the implications
If you combine vacation and sick time into one PTO bank in a state like California or Colorado, the entire balance becomes payable at termination—even the portion that would have been "sick leave."
What Happens If You Miss the Deadline?
Consequences vary by state but typically include:
- Waiting time penalties: Additional wages owed for each day you're late
- Statutory penalties: Fixed amounts per violation, sometimes per day
- Interest: Accruing on unpaid wages
- Multiplied damages: 2x or 3x the amount owed in states like Massachusetts
- Attorney's fees: Many state wage laws allow employees to recover legal costs
- Administrative complaints: State labor departments can investigate and impose fines
- Litigation: Class actions for systematic violations
The reputational damage matters too. Disgruntled former employees talk, post on Glassdoor, and warn others. In a tight labor market, that's a cost you can't easily quantify.
How to Stay Compliant
Know where your employees actually work
For each employee, you need to know which state's laws apply. For remote workers, this is typically the state where they perform their work, not where your company is headquartered.
Build triggers into your payroll system
When a termination is processed, your system should flag the state-specific deadline and ensure the final check is issued on time.
Don't wait for HR to tell payroll
Many final paycheck violations happen because terminations aren't communicated to payroll quickly enough. Same-day notification processes are essential if you have employees in immediate-payment states.
Review your PTO and floating holiday policies
Make sure you understand whether your policies create payout obligations. If you offer floating holidays in California, Colorado, or Massachusetts, assume they'll need to be paid out unless they're explicitly tied to specific events.
Have a multi-state compliance resource
State laws change, and keeping a spreadsheet updated manually is a recipe for errors.
About Payroll Beacon
We built Payroll Beacon because we were tired of the same thing you are: Googling payroll compliance laws, finding outdated information, and never being quite sure if we had it right.
Payroll Beacon tracks final paycheck deadlines, vacation payout requirements, floating holiday rules, and over 5,100 other payroll compliance data points across all 50 states—always current, always accurate.
This article is for informational purposes only and does not constitute legal advice. Consult with qualified legal counsel for guidance specific to your situation. Laws change frequently; verify current requirements with your state's department of labor.