What happens to accrued PTO upon termination?

Recently, a question that seems to be posed to me by many business owners is:  “When an employee quits or is terminated, must I pay out accrued but unused paid time off?” Arizona law requires all employers to pay terminated employees all wages due to the employee following termination.  The question, however, is whether paid time off is “wages”.

Arizona law defines wages as “nondiscretionary compensation due an employee in return for labor or services rendered by an employee for which the employee has a reasonable expectation to be paid… Wages include sick pay, vacation pay, severance pay, commissions, bonuses and other amounts promised when the employer has a policy or a practice of making such payments.” The law clearly states that paid time off is considered wages if an employee has a “reasonable expectation” of receiving the same. The statute makes it clear that an employer can manage an employee’s expectations through written policies.  Past practices of an employer can also influence an employee’s expectation on whether he or she will receive paid time off upon termination.

If a business owner has no written policy on paid time off, all one needs to do to determine whether he or she needs to pay an employee accrued but unused time off upon termination is look at how the matter was handled in the past.  If the business owner has a history of paying out paid time off upon termination, the employee probably has a reasonable expectation that this policy will continue upon his or her termination.  However, if the business has a written policy on the matter, the employee’s expectations will be clarified by the policy.  Keep in mind that business owners are not bound forever by past course of performance or by aging policies written years ago.  Business owners can change policies at any time provided advanced notice is given to all employees.

By implementing clearly written policies, business owners can take the guesswork out of whether accrued but unused paid time off should be paid out upon termination.   Once these policies have been put in place, it is also a good idea to periodically review and update policies to ensure that they are in line with the goals and ideals of the business.

Note that effective July of 2017, sick pay is treated separately than paid time off.  Sick pay is specifically governed under A.R.S. § 23-372.  More information can be found here.

James A. Kuzmich, Esq. is the managing partner of Kuzmich & Associates located in Tempe, Arizona.  In his practice, Jim assists many businesses throughout the state with a variety of legal issues, including employment contracts, leases, contract review and business transactions.  Jim can be reached through our contact page.

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