Article
12 min read
PTO Payout Laws by State: Ensuring Full Compliance with US Requirements
PEO
US payroll
Author
Shannon Ongaro
Published
December 02, 2024
Last Update
December 09, 2024
Table of Contents
Understanding PTO (paid time off) and payouts
State-by-state breakdown of PTO payout laws
Common challenges in managing PTO payout compliance
Best PTO practices for payroll managers
Simplify PTO payout across the US with Deel
Key takeaways
- In the United States, there are no federal laws mandating PTO. Instead, each state has its own law guiding PTO payouts.
- While manual tracking systems for PTO are common, they're also prone to error and can result in compliance issues.
- With Deel PEO, you can offload US payroll, HR, and benefits administration to ensure your PTO policies are compliant.
In the United States, there are no federal mandates on paid leave. This means each state has the autonomy to create its labor law as it sees fit. As a payroll manager overseeing multiple branches across the country, navigating different states' laws can be a handful.
However, understanding the laws of each state and using an automated solution can help you avoid conflicts in employee scheduling, and the risk of non-compliance with the PTO laws of your state.
In this guide, we’ll walk you through everything you need to know about PTO payout laws by state.
Understanding PTO (paid time off) and payouts
Paid time off (PTO) is a benefit policy that allows employees to step away from work for a specific period and still get paid.
PTO can be used for different purposes, including taking personal time off, going on vacation, taking time to recover from illness, or grieving the loss of a loved one.
Paid time off allows your employees to:
- Take time off work to rest and return with fresh energy
- Handle personal and family emergencies
- Attend to other important affairs without sacrificing their income
For employers, paid time off allows you to:
- Ensure your employees stay productive
- Prevent employee burnout and turnover
- Attract top talent to your company
- Increase employee satisfaction and loyalty and reduce turnovers
The two major types of accrual systems that dictate how you can allocate paid leave to employees include:
- Lump-sum PTO: This policy allows employees to receive a set amount of paid time off at a certain period. This can be at the start of the year or on their work anniversary
- Accrued PTO: Here, paid time off accumulates based on the number of hours the employee works. The more hours they work, the more PTO they earn. For example, an employee can earn 2 hours of PTO when they put in 40 hours of work
Payout vs. no payout: What it means for payroll managers
PTO payouts occur when the employer pays out the value of an employee's unused paid time off. This can happen at the year's end or when an employee leaves the company.
In contrast, no payout PTO occurs when you don’t compensate employees for any unused paid time off. This means employees must use their paid leave before a particular timeframe or they risk losing it. This is also known as the “use it or lose it policy.”
Further reading: What is unlimited PTO?
Federal law vs. state law on PTO payouts
In the US, there is no federal law that mandates employers to provide paid time off to their employees. The Fair Labor Standard Act (FLSA), which governs wage and hour laws, states that employers are not obligated to pay for their workers' paid time off or pay for any unused PTO when employees leave the company.
The Department of Labor gives individual states and employers the autonomy to determine what their PTO policy would look like. Some states make it mandatory for employers to pay their employees the value of their unused time off as wages. In other states, companies are not obligated to do so.
In the next section, we’ll examine the states that require employers to pay upon termination and the ones that don’t allow employers to implement use-it-or-lose-it policies.
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State-by-state breakdown of PTO payout laws
Here’s a breakdown of PTO payout laws by state in 2024:
| State | Payout requirement | Conditions for payout | Additional notes |
|---|---|---|---|
| Alabama | Optional | Employers are mandated unless their PTO policies state otherwise. | Payout for accrued paid time not more than 480 hours |
| Alaska | Optional | Employers are mandated unless their PTO policies state otherwise | Determined by employers’ policies |
| Arizona | Optional | Employers are mandated unless their PTO policies state otherwise | Determined by employers’ policies |
| Arkansas | Optional | Employers are mandated unless their PTO policies state otherwise | Determined by employers’ policies |
| California | Mandatory | None | Use-it-or-lose-it policies are not allowed |
| Colorado | Mandatory | None | Use-it-or-lose-it policies are not allowed |
| Connecticut | Mandatory | None | The law requires use-it-or-lose for vacations only |
| Delaware | Mandatory | Compulsory for employers with at least 10 employees | Not specified by the law |
| Florida | Optional | Employers are mandated unless their PTO policies state otherwise | Not specified by the law |
| Georgia | Optional | Permitted not compulsory | Not specified by the law |
| Hawaii | Optional | Permitted not compulsory | Not specified by the law |
| Idaho | Optional | Permitted not compulsory | Not specified by the law |
| Illinois | Mandatory | None | Regulated use-it-or-lose-it policies |
| Indiana | Optional | Permitted not compulsory | Use-it-or-lose-it is permitted |
| Iowa | Optional | Permitted not compulsory | Use-it-or-lose-it is permitted |
| Kansas | Optional | Permitted not compulsory | Not specified by the law |
| Kentucky | Optional | Employers are mandated unless their PTO policies state otherwise | Use-it-or-lose-it is permitted |
| Louisiana | Optional | Permitted not compulsory | Determined by employers’ policies |
| Maine | Mandatory | Mandatory for employers with over 10 employees | Employees can accrue a maximum of earned 40 hours of paid leave |
| Maryland | Optional | Permitted not compulsory | Use-it-or-lose for vacation only |
| Massachusetts | Mandatory | PTO payout upon separation | Use-it-or-lose for vacation only |
| Michigan | Optional | Permitted not compulsory | The law requires use-it-or-lose for vacations only |
| Minnesota | Optional | Permitted not compulsory | Not specified by the law |
| Mississippi | Optional | Permitted not compulsory | Not specified by the law |
| Missouri | Optional | Permitted not compulsory | Not specified by the law |
| Montana | Mandatory | Requires employers to pay unless their PTO policies state otherwise | Limit on the amount of accrued paid time |
| Nebraska | Mandatory | Permitted not compulsory | Use-it-or-lose-it policies are not allowed. |
| Nevada | Optional | Permitted not compulsory | Not specified by the law |
| New Hampshire | Optional | Employers are mandated unless their PTO policies state otherwise | Determined by employers’ policies |
| New Jersey | Optional | Permitted not compulsory | Determined by employers’ policies |
| New Mexico | Optional | Permitted not compulsory | Determined by employers’ policies |
| New York | Optional | Permitted not compulsory | Determined by employers’ policies |
| North Carolina | Optional | Permitted not compulsory | Payment for unused accumulated paid leave upon termination |
| North Dakota | Optional | Requires employers to pay unless their PTO policies state otherwise | Determined by employers’ policies |
| Ohio | Optional | Permitted not compulsory | Determined by employers’ policies |
| Oklahoma | Optional | Temporary employees and those with limited-term employment are not eligible | Employees with less than 5 years of employment could only accrue a limit of 240 hours of annual leave |
| Oregon | Optional | Permitted not compulsory | Determined by employers’ policies |
| Pennsylvania | Optional | Permitted not compulsory | Determined by employers’ policies |
| Rhode Island | Optional | Permitted not compulsory | Determined by employers’ policies |
| South Carolina | Optional | Employers are mandated unless their PTO policies state otherwise | Determined by employers’ policies |
| South Dakota | Optional | Employers are mandated unless their PTO policies state otherwise | Determined by employers’ policies |
| Tennessee | Optional | Employers are mandated unless their PTO policies state otherwise | Determined by employers’ policies |
| Texas | Optional | Employees are eligible for vacation each fiscal year given that they have been employed in the state for 6 months | No specific state law addressing PTO payout |
| Utah | Optional | Employers are mandated unless their PTO policies state otherwise | Determined by employers’ policies |
| Vermont | Optional | Employers are mandated unless their PTO policies state otherwise | Determined by employers’ policies |
| Virginia | Optional | Employers are mandated unless their PTO policies state otherwise | Determined by employers’ policies |
| Washington | Optional | Employers are mandated unless their PTO policies state otherwise | Determined by employers’ policies |
| West Virginia | Optional | Employers are mandated unless their PTO policies state otherwise | Determined by employers’ policies |
| Wisconsin | Optional | Employers are mandated unless their PTO policies state otherwise | Determined by employers’ policies |
| Wyoming | Optional | Employers are mandated unless their PTO policies state otherwise | Determined by employers’ policies |
Tip: State-specific PTO payout laws can change over time. Refer to your state’s official websites for updates to avoid the risk of non-compliance. You can also consult with a legal expert to help navigate the complexity of the legal process.
See also: Supplemental Tax Rates by State (2024)
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Common challenges in managing PTO payout compliance
Below are some of the likely challenges you might run into when managing payout compliance for your company:
Challenges by the size of the business
When employees take extended leave, companies typically hire temporary staff to fill in for them. For smaller companies, this may not be an option due to budgetary, resource, or time constraints. As a result, employers might need to enforce a PTO request blackout, whereby some employees aren’t allowed to take time off.
Larger companies, on the other hand, may struggle with finding a system that helps them seamlessly manage a large quantity of PTO requests. Many employers still use outdated methods like physical forms or spreadsheets to track and allocate paid leave. These methods make it difficult to identify trends in time-off usage which can lead to conflicting requests and errors in calculating accrued PTO for each staff.
Technology and system limitations
Since PTO laws vary across states and are always changing, using a payroll system that can’t handle the nuances of state laws on PTO can put you at risk of non-compliance.
For instance, in Illinois, employers who refuse to comply with state regulations on PTO may be required to:
- Pay the amount of wages they owe
- Pay an extra 5% of the fee each month the wages is delayed
- Pay an additional fee of $1,000 USD for unpaid wages above $10,000
To prevent this, you need to consider using payroll solutions that are equipped with built-in compliance safeguard features. A good payroll management tool should provide up-to-date labor regulations on accrual rates, carryover limits, payout requirements, and conditions. Using a tool with these features will help you stay compliant with state law and company policy.
See also: Stay Ahead of Changing Regulations With These 3 Compliance Strategies
Tracking PTO accrual and forfeiture policies
Tracking PTO accruals can be very tricky to navigate. This is because each state's legal requirement on PTO accruals and payout varies, making it hard to ensure compliance if your company is based in multiple states.
Additionally, communicating your company’s forfeiture policies and PTO usage can be a significant administrative burden, especially on lean payroll and HR teams. A PTO tracking solution that provides real-time updates on each employee's PTO balance can automate this process and allow your team to focus on more strategic tasks.
Free Download: PTO Policy Template
Best PTO practices for payroll managers
Implementing a successful PTO policy requires more than understanding each state's laws on paid leave. This section will walk you through some of the best practices for payroll managers to better manage their PTO:
Accurate tracking and documentation
Consider using payroll tracking software to track your employees' accrued PTO while reducing the risks of manual errors. Aside from tracking, you should also keep detailed records of all PTO information such as accruals, employee usage, and payout. This documentation is vital for dispute resolution.
Here are some of the key features you should look out for in PTO tracking:
- A centralized database where you can keep detailed and organized payroll records
- An intuitive portal that gives employees all the necessary information they need to know about their paid leave
- Seamless integration with payroll, time tracking, and other HR software
Regular compliance audits
Periodic audits will help ensure you comply with the latest state laws so you can upate your company’s policy accodingly. When conducting a compliance audit, examine the financial strength of your company, employee benefits, and local legislative changes that impact paid time off. This audit may include a review of:
- State and local laws: Begin by examining current state and local regulations governing PTO, sick leave, and other time-off policies. These laws can vary significantly by location, so ensure your policy complies with each jurisdiction where your employees work
- Financial stability: Assess your company’s financial strength to confirm that your PTO policy is sustainable. Review cash flow, accrual balances, and payout liabilities to avoid overpromising benefits that could strain resources
- Employee benefits alignment: Evaluate how your PTO policy integrates with other employee benefits, such as sick leave, parental leave, and wellness programs. A cohesive approach ensures your benefits package remains competitive and supports employee well-being
- Internal policy consistency: Compare your PTO policy against other company policies to ensure consistency. Misalignment can lead to confusion or disputes, so harmonize your policies to reflect clear and unified guidelines
Transparent PTO policies and communication
As a payroll manager, it’s important to keep employees informed about any updates to your company’s PTO policy. Share changes through email or Slack, explaining what’s new and how it affects them. You can also host a virtual or in-person meeting to share details and hear employees’ thoughts. If you prefer, use an anonymous survey to gather feedback.
Once you’ve implemented new changes in your PTO policies, add them to your employee handbook and share the updated version with your team.
Deel PEO
Simplify PTO payout across the US with Deel
To manage employee paid leave, you need to understand your state's requirements to avoid the risk of non-compliance. However, if you’re overseeing multiple branches across the country, it means understanding multiple PTO requirements—which takes time.
Deel PEO takes the weight off your shoulders by ensuring full compliance with payroll requirements across all 50 states in the US, so you can focus on scaling your business. With Deel US Payroll, you can also calculate your payroll taxes and automatically sync your data with your accounting software.
Ready to learn more about how Deel can streamline your PTO process? Book a demo today.
FAQs
Which states require PTO payout?
The following states mandate PTO payout:
California, Colorado, Illinois, Connecticut, Delaware, Nebraska, Montana, Illinois
Can you cash out PTO at any time?
No, there’s a timeframe set by the state or company’s policy on how long you can accrue paid leave before it’s forfeited.
Is PTO payout taxed differently?
Yes, PTO payout is considered wages in many states and is subjected to federal, states, and local government taxes.
What happens to PTO when you get fired?
This is determined by the state law and company policy. In states where PTO is mandatory, you will be paid upon termination.
About the author
Shannon Ongaro is a content marketing manager and trained journalist with over a decade of experience producing content that supports franchisees, small businesses, and global enterprises. Over the years, she’s covered topics such as payroll, HR tech, workplace culture, and more. At Deel, Shannon specializes in thought leadership and global payroll content.
