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June 13, 2011
Vacation Accrual and Payout

In a BLR webinar entitled "Paid Time Off: Best Practices for Compensating Employees When They Dip Into Their PTO Banks," John P. Hagan, Esq., a partner in the Dallas office of Sarles & Ouimet, LLP described some of the different "use it or lose it" philosophies when it comes to paid leave benefits.

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One purpose of not allowing paid leave to accrue is to avoid huge leave banks over time or large payment obligations that may be cashed in upon termination. Another purpose is to incent employees to take breaks, reduce stress and improve performances.

Laws do not require employers to make a decision one way or the other when it comes to use it or lose it. As a general rule, paid time off will be covered by employer policies, such as vacation or Paid Time Off (PTO) policies, or by state law.

State laws vary on use it or lose it, but the majority of companies do offer some kind of paid time off. Nearly half the states regulate vacation time in some way, at least in terms of requiring its payment upon termination. Some states allow vacation time to accrue, but only to a certain limit.

The key is to have a well-written policy, and to bear in mind that state law varies significantly. The United States Department of Labor Wage and Hour Division offers a link to state law resources.

Converting unused leave to cash ("cashing out") is allowable by many companies, again provided it does not violate state law. It should be noted that there are potential tax consequences and penalties to consider (26 C.F.R. section 1.451-2) when the accrual of vacation may be considered part of wages.

John P. Hagan, Esq., a partner in the Dallas office of Sarles & Ouimet, LLP (www. sarleslaw.com), is a trial lawyer Board Certified in Labor & Employment Law by the Texas Board of Legal Specialization. Focusing primarily on employment law, Hagan advises and defends corporate employers, both large and small, on employment disputes. He helps employers avoid and, if possible, resolve employment disputes before they ever reach litigation on a wide variety of employment issues.

Need help staying on top of critical HR and Compensation issues? See all the webinars BLR has to offer.

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