Q&A #65 – Is it legal to implement a “use it or lose it” annual PTO policy?

Question: My nonprofit organization has had issues in the past with staff accumulating large amounts of unused PTO that carried over from year to year, so we are considering implementing a “use it or lose it” policy. Is this legal?

Answer: Whether an organization is allowed to implement a “use it or lose it” policy for annual paid time off (PTO), under which employees would forfeit unused PTO by the end of each year, depends on the state laws applicable to where the employees work. This can be a difficult question with respect to PTO policies that combine vacation and sick leave, as some states have different rules for each type of leave. In general, it is usually permissible to have a limit on the carryover of unused leave or a cap on maximum leave accrual, but it is important to think through the details and carefully review the laws of all applicable states.

There are generally two types of legal issues to watch for.

First, there are some states that prohibit “use it or lose it” policies with regard to paid vacation leave. However, an alternative that is generally permitted in these states is to place a reasonable overall cap on the accrual of paid vacation leave. By setting a cap, an employee would not be allowed to accumulate additional leave in excess of the cap until they use some of the leave. This is a subtle difference but achieves a similar effect.

Second, an increasing number of states have passed legislation setting forth minimum paid sick leave requirements. Some of these states require that employees be allowed to carry over unused paid sick leave from year to year. Acceptable alternatives to “use it or lose it” policies in these jurisdictions may include placing an overall cap on the accrual of paid sick leave (this cap should be no lower than the minimum number of paid sick days required to be provided to employees under the law) or limiting the number of paid sick days that an employee is permitted to use each year.

Planning Tip – Pay careful attention to which states your organization’s employees work from, especially when you allow staff to work remotely. While remote work has many benefits, the need to navigate the employment laws of numerous different states is a significant complicating factor, especially with regard to paid leave. The hiring of a new remote employee or the relocation of an existing remote employee should prompt your organization to review its paid leave policies if these events implicate the laws of a new state. In any case, be sure to regularly update your list of all employee remote work locations, noting changes as they occur.

Navigating this patchwork of different leave laws can be quite challenging, especially for organizations that have employees working in multiple states and PTO policies that combine vacation and sick leave and. Most organizations prefer to have one uniform set of leave policies that apply to all employees regardless of the state, but there may be times when it is necessary to have special provisions for employees working in particular states in order to ensure full compliance. In any case, the issue of year-to-year carryover of PTO is one that requires special attention.

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