Do we have to pay out vacation when the employment relationship ends?

The answer depends on state law. Some states consider earned vacation to be a part of wages, and unused vacation earned by the employee must be paid out when the employment relationship ends. Other states do not require you paying out unused vacation unless you have a policy or agreement that you will do so.

Employers are required to pay out earned but unused vacation time upon separation, even if the employee quit without notice or was terminated for cause, in the states of California, Colorado, Illinois, Louisiana, Massachusetts, Montana, Nebraska, North Dakota, Rhode Island, West Virginia, and Wyoming.

Note that Colorado law is a bit unclear on whether payout is actually required, but the safe option is to make the payment.

Rhode Island requires payout of unused vacation time only if the employee has completed one year of service.

Illinois does allow “use it or lose it” vacation policies during employment, but does not allow a “lose it” provision upon separation. Even if current employees “lose” unused vacation at the end of the year, they must still be paid for any remaining time upon separation.

In addition, the states of Maryland, New York, and North Carolina require that the employer’s policy explicitly describe any vacation forfeiture provisions. Payout of unused vacation upon departure can be withheld, but only under the conditions specified in the policy.

Describing any forfeiture provisions is a good idea because all states generally require employers to abide by their policies. If the policy makes a promise to pay out the unused time, many states will even allow employees to file a wage claim based on the policy terms. Some states do allow employers to deny vacation pay even if the policy does not address the issue, but adopting a clear policy can help avoid confusion and frivolous claims.