I know accrued vacation has to be paid out at termination, but is there a formula to calculate exactly how much is owed?
Vacation and paid time off (PTO) are considered “vested” benefits under California law, so employees must be paid out all accrued but unused vacation and PTO along with their final wages.
Vacation/PTO payout at termination must be prorated on a daily basis and must be paid at the final rate of pay in effect as of the date of the separation.
The California Labor Commissioner gives this example of how to calculate the daily proration on termination of employment:
An employee who is entitled to three weeks of annual vacation (15 work days entitlement per year x 8 hours/day = 120 hours vacation entitlement per year) who quits on August 7 (the 219th day of the year) without having taken any vacation during the year, who has no vacation carryover from prior years, and whose final rate of pay is $13 per hour, would be entitled to $936 vacation pay upon separation, calculated as follows:
• 219 days (August 7, date of quit) ÷ 365 days/year = 60%
• 60% of 120 hours vacation entitlement = 72 hours vacation earned and accrued through August 7
• Vacation days used = 0
• Vacation earned but not taken at time of separation = 72 hours
• 72 hours x $13/hour = $936 vacation pay due at separation.
Pay Out All Time Accrued
It is important to note that all accrued vacation/PTO must be paid out at termination even if the employee was not yet eligible to actually use the vacation/PTO time.
For example, an employer might have a policy that an employee who begins accruing vacation at the beginning of employment is not permitted to use that vacation time until after six months or a year of continuous service. If that employee quits or is terminated after just a few months of employment, the prorated vacation/PTO balance still must be paid out since it is a vested benefit that belongs to the employee.
Note that sick leave which is kept separate and not combined into any type of PTO plan is not a vested benefit and therefore does not need to be paid out at termination.
The Labor Law Helpline is a service to California Chamber of Commerce preferred and executive members. For expert explanations of labor laws and Cal/OSHA regulations, not legal counsel for specific situations, call (800) 348-2262 or submit your question at www.hrcalifornia.com.