Accrued Vacation

One question likely to arise when an employee leaves is whether or not you have to pay that employee for accrued vacation pay. The answer to that question will turn on how you've administered your vacation policy and how you've treated amounts paid to employees for periods when they were on vacation. Employers are pretty much free to set whatever vacation policy they choose. However, if you choose to provide paid vacations as an employee benefit, you must administer those benefits uniformly and even-handedly.

If you treated vacation pay as wages for employees, you'll treat them the same way for terminated employees. This approach avoids having your vacation pay policy treated as a vacation plan under ERISA.

The following example illustrates scenarios of how an employee may accrue vacation:

Example

Your vacation policy is that employees earn one day of vacation at the end of each three weeks of work. An employee quits 30 weeks into the year, without having taken any vacation days. This employee has accrued 10 days of vacation, and should be paid for them upon termination.
In contrast, suppose you decide that each employee becomes entitled to four weeks of vacation on each January 1. An employee who starts on March 15 and quits on September 29 doesn't accrue any vacation and need not be paid any amount with respect to vacation time when he or she terminates employment with you.

Thus, the amount of vacation pay that an employee should receive at the time of termination is wholly dependent on your policy regarding accrual of vacation time. Just remember that you have to treat every employee the same. If you pay one former employee for unused vacation time, you have to pay all other terminated employees for their unused vacation time.