Employment Law 101: Accounting for Vacation Pay by Susan Funaro

Employment Law 101: Accounting for Vacation Pay

The U.S. government does not regulate benefits in the private work sector, but as an employee you do have rights.

by Susan Funaro
updated September 04, 2020 · 5 min read

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It may come as a surprise that there are no U.S. laws requiring employers to offer vacation time whether paid or unpaid to its workers. The U.S. is one of the few industrialized nations where the government does not regulate benefits in the private work sector.

On the bright side, once a business establishes a policy, they must be sure they comply with related federal and state laws. In other words, once it's been promised, employees are entitled to their vacation time and pay. 

All Work and No Play

The US does not compel business owners to provide vacation pay. But, luckily even though the government will not pressure business owners into providing vacation time, good old competition will. And, in order for any company to remain competitive in recruiting the best and the brightest, vacation is typically at the top of the benefits list.

What Should Employees Know About Their Company's Vacation Policy?

The best thing you can do to arm yourself is to read your company's employee handbook. If the handbook is poorly written, does not follow state or federal laws, or does not follow its own company policies, employees can cite it to prove unfairness in vacation policy and open the business to lawsuits.

What Do Business Owners Need to Know About Providing Vacation Pay?

Your first step as a business owner will always be to check with your state's labor laws regarding vacation for each and every kind of employee.

You will want to evaluate who is eligible for vacation pay taking into account which employees are full time and part-time. You will also want to check how vacation is pro-rated for part-time employees. Then, you can set about determining or perhaps revising policies for your own company.

When you do, you will want to consider how vacation is accrued and accumulated. Consult the laws about accrual and accumulation so you go by the book when you determine how employees receive vacation time. Traditionally, companies allow employees to accrue based on length of service or by pay period.

Unused Vacation

The next big obstacle is unused vacation. Depending on the state, this area of labor law can get sticky so be careful. Are you planning on capping carryover vacation? Buyer Beware: some states like California prevent employers from having a "use it or lose it" vacation policy. The use it or lose it policy basically states that an employee forfeits accrued vacation if it is not used by an anniversary date. Conversely, an employer can cap the amount of vacation employees can accrue.

Unused Vacation at Termination

You may be wondering what happens when you terminate an employee. Remember, states may have laws protecting employees who have accrued vacation time and corresponding pay. So, if an employee accrues vacation time, the company must pay out the vacation pay when the employment ends.

Also, an employer cannot deduct vacation pay without the employee's consent. So, a business owner must pay all wages, including accrued vacation within a stipulated time period after the employee terminates. An employer cannot keep vacation pay as a form of discipline against an employee they release. In fact, some states will prosecute an irresponsible employer. Employees can also sue in civil court even if their state lacks specific laws regarding final wages.


Again, once in place, you cannot administer vacation in a discriminatory way. An employer who violates their own vacation policy in an arbitrary or inconsistent way with its employee or refuses vacation wages at termination may be violating Federal Laws, particularly if an employer is using vacation to retaliate against an employee. An unfair or inconsistent vacation policy could be challenged by employees under the following Federal laws:

Government Protected Leave

There is also government protected time-off. The types of leave protected by law include: voting, jury duty, military leave, as well as FMLA. Employers should check federal and state laws carefully, because there may also be instances when an employee cannot be compelled to use vacation time for such absences.

  • Voting. While there are no federal laws requiring private employers to give employees time off to vote, 32 states require paid time for the employee to vote. Depending on state law, violations can result in fines or even jail time to violating employers.
  • Military Leave. Any employee called to military service, training, or reserve duty who is not a temporary employee is covered by federal law. An employer may not charge military leave to vacation leave. The employee may choose to use their paid vacation time where military leave is not paid.
  • Jury Duty. Both federal and state laws require that employers of all sizes provide employees with jury duty leave. Under the federal law, employees have the right to take leaves of absence to serve on a federal jury. State laws protect employees serving on state and local juries. Violations by employers can be treated as contempt of court, misdemeanors or authorize employees to take court action.
  • FMLA. The Family and Medical Leave Act requires covered employers to grant employees up to 12 workweeks of unpaid leave during any 12-month period. While the federal law is directed to employers with 50 or more employees, several states have family medical leave laws for companies with far fewer employers.

One Final Thought

Although there are no specific vacation laws in the U.S., there are several federal and state laws that require employers to treat employees fairly when vacation policy is established. Some employee absences are protected by laws that do not require them to take it as vacation time. Many state laws require employers to compensate employees for accrued vacation when they terminate. Establishing and carrying out policies so they are fair and do not violate other laws can be a complicated enterprise. 

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About the Author

Susan Funaro

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