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.

Beware buy-backs

It’s perfectly legal to offer buy-backs for unused vacation or PTO days.
Just keep in mind that FLSA requires you to count this money toward total compensation when calculating overtime pay. Otherwise, you could be sued  for OT violations.

 You can save your company a lot of future headaches – both in terms of lost time and money – by taking a hard look at your vacation pay policies now.

Experts recommend bringing the issue to the attention of senior management and huddling with your organization’s legal counsel. Three questions to discuss:

• Where does your state stand?
• Do you need to revise your handbooks?
• Could PTO cost more money in the long run than it saves now?

Many organizations have made the switch from separate vacation and sick-time leave to single paid time off (PTO) banks. If you take the plunge, beware hidden traps.

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. The scariest part: Employers haven’t been faring too well in court.

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

Here’s the biggest problem with PTO: 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, a host of states are considering whether to amend vacation-pay laws or to leave interpretations up to the court system.

Meanwhile, some labor attorneys recommend organizations with PTO go back to separate vacation and sick banks for their own protection.

Beware buy-backs

It’s perfectly legal to offer buy-backs for unused vacation or PTO days. Just keep in mind that FLSA requires you to count this money toward total compensation when calculating overtime pay. Otherwise, you could be sued for OT violations.

You can save your company a lot of future headaches – both in terms of lost time and money – by taking a hard look at your vacation pay policies now. Experts recommend bringing the issue to the attention of senior management and huddling with your organization’s legal counsel.

Three questions to discuss:

1. Where does your state stand?
2. Do you need to revise your employee handbooks?
3. Could PTO cost more money in the long run than it saves now?