When Employers Must Pay Leave Benefits on Employees’ Separation

When departing a company, many employees are shocked to learn that their employer is not required to pay them for their unused leave benefits. Whether an employee is entitled to sick leave, vacation leave, or paid time off (PTO) benefits varies from state to state, and often from employer to employer. Leave benefits and associated payouts depend largely on the policies and rules in an employer’s handbook or employment contract.

No federal law requires an employer to provide an employee with sick leave, vacation leave, or PTO. There is also no federal law governing leave payouts. Some states, though, have passed legislation governing leave benefits, such as requiring employers to provide employees with sick leave. Ultimately, an employee’s entitlement, if any, to a leave payout upon separation turns on the employer’s handbook or employment contract; whether the leave is classified as sick, vacation, or PTO; and, in some cases, applicable state laws.

The Distinction Between Sick Leave and Vacation Leave or Paid Time Off

The terms “sick leave” and “vacation leave” are self-explanatory and commonly well-understood. Paid time off (PTO) refers to employers combining sick and vacation leave into one benefit.

Generally, contract law governs whether an employer is required to pay sick leave, vacation leave or PTO when an employee separates from the company. This means that an employee’s entitlement to a leave payout, if any, depends on the employer’s written policies, if any, and whether the employer effectively communicated the policies to the employee. Employers usually set out these policies in a company handbook or employment contract.

In some states, courts have interpreted PTO and vacation pay to constitute wages, thus holding that an employer is required to pay an employee for any unused PTO or vacation leave he or she has accrued upon the discharge or separation.

State courts have generally held that sick leave is a benefit an employer is not required to pay at termination because it is only an applicable benefit if an employee gets sick. If an employee has unused sick leave at the time of separation, the employee is not entitled to a sick leave payout because he or she is not sick.

Basic Rules in Maryland, Virginia, and Washington, D.C.

By July of 2027, Maryland, Virginia, and Washington, D.C. will all require employers to provide paid sick leave (with some conditions).

Washington, D.C., since 2008 has had the Accrued Sick and Safe Leave Act, D.C. Code Section 32-131.02, which requires all employers to provide paid leave to employees who have been employed for at least one year and have worked at least 1,000 hours during the previous twelve months. Under the statute, the minimum amount of leave an employer must provide depends on the size of the employer’s workforce.

In 2014, Maryland passed the Healthy Working Families Act, Md. Code Ann., Lab. & Empl. § 3-1304, which requires employers with 15 or more employees to provide paid sick leave and employers with fewer than 15 employees to provide unpaid sick leave. Employers may limit the amount of leave taken per year as long as the limits are within the confines of the statute.

Virginia law does not currently mandate sick leave for all employees. Currently, only home health workers are guaranteed sick leave under the law.[1] But starting on July 1, 2027, all Virginia workers must be provided one hour of paid sick leave for every 30 hours worked.[2] An employer’s existing PTO policy may be deemed sufficient under the law if the policy provides for PTO that can be used for sick leave and provides at least the mandated the amount of sick leave.

Employers in Maryland, Virginia,[3] and Washington, D.C., are not required to provide paid or unpaid vacation leave to employees. Any employee entitlement to vacation benefits or a payout of such benefits upon separation is determined by the employer’s policies or employment contract and is governed by contract law. But once employers do provide vacation leave to employees, any unused earned vacation leave may need to be paid out to employees upon separation.

For example, in 1981, the D.C. Court of Appeals, in deciding whether employees were entitled to a payout of unused leave, cited the general rule for sick leave payouts in D.C. and many other jurisdictions: “An employee who accrues but does not take vacation or other paid leave is entitled to monetary compensation for that leave upon discharge from employment, absent an agreement to the contrary.”[4] The court in National Rifle Association v. Ailes held that “(1) the right to accrue paid leave implies the right to compensation for unused leave upon discharge from employment, and (2) once a discharged employee has established the right to accrue leave and the amount of leave unused, the employee is entitled to compensation for it unless the employer sustains the burden of proving ‘an agreement to the contrary.'”[5]

A 2011 Maryland District Court case applied the same contract law principles as those cited in the National Rifle Association case.[6] The Maryland District Court held that based on its reading of the employee’s employment contract, the employee was entitled to accrued and unused vacation and sick leave up through the date of her termination.[7][8]

These two cases illustrate the general rule that leave payouts are governed by express agreements between the employer and employee, typically in such formats as an employee handbook or employment contract.

With all of the above in mind, employees should not simply expect a payout for their unused leave benefits as they prepare to separate from their employer. Instead, employees should remember that entitlement to a leave payout will generally be governed by the employer’s handbook or employment contract. When planning their departure, an employee should first review the employer’s handbook and employment contract (if applicable). These documents will likely tell the employee whether he or she is entitled to a payout.

If you are uncertain whether you are entitled to a payout, you should contact an experienced employment attorney, such as the attorneys at The Employment Law Group.