Forfeiture of Accrued but Unused Paid Time Off for Employees

One of the recurring and sometimes difficult challenges for employers is determining how to structure a Paid Time Off (PTO) policy, and in particular how to address what happens to PTO “earned” or “accrued” by an employee but not used, either by the end of the measuring year, or at termination of employment.

This topic has recently become a matter of discussion in New Hampshire.  A bill was introduced in this year’s legislative session which would, if passed, significantly change the rules of the game.  The bill, known as HB 1201, states that “an employer which offers paid vacation time to its employees shall, no later than 30 days after the end of the period in which such vacation time is earned, pay its employees for earned but unused vacation time.  An employer’s policy requiring an employee to forfeit earned but unused vacation time shall be contrary to this section and unenforceable.”

As a general matter, in New Hampshire the current law permits an employer to set up its PTO policy as it sees fit.  So long as the employer effectively communicates the policy to its employees, the New Hampshire Department of Labor (and the courts) ordinarily will respect and enforce that employer policy.  Of course, a wise employer will be careful to document that the policy has been adequately communicated to its workforce through a written policy and an acknowledgement of receipt of the policy from the employees.

Many employers provide, in their policies, that if accrued PTO is not used by the end of the year, it is forfeited and cannot be “carried over” to the next year (or perhaps some portion can be carried over, but subject to a maximum amount of PTO that may be accumulated by employees).  This “use it or lose it” policy seems not to be particularly controversial, and is certainly prudent for employers so they do not inadvertently carry on their books large potential liability arising from significant accumulations of unused PTO that ultimately will have to be paid out.

The treatment of unused accrued PTO at termination of employment is more varied.  In my experience most employers pay out unused PTO to employees at termination, no matter what the circumstances that led to the end of employment.  A significant minority of employers, however, include in their policies certain conditions that must be met for the employee to receive these monies.  For example, employers will state that the unused PTO will be forfeited if the termination was for cause, if the employee failed to provide adequate notice as requested in the employer’s policies, and sometimes for other reasons.

HB 1201 is presumably designed to render unenforceable both annual “use it and lose it” policies, as well as policies that would forfeit accrued but unused PTO under certain conditions at the end of employment.  Even if this particular bill does not become law, employers should be diligent in how they implement and give notice of policies imposing PTO forfeiture upon termination of employment.  They must understand that employees may not have carefully read and understood these sort of policies, or may not remember the policy by the time of termination of employment.  This is one of those HR areas where communication is crucial so employees do not have inaccurate expectations that lead to unnecessary disputes.

About the Author: Steve Winer

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