Should an employer pay accrued vacation leave at the rate of pay the employee actually earned the leave or at the employee's current rate of pay?

Employers generally are not required to offer paid vacation leave to employees, absent any mandated vacation benefits under an employment contract, state law or a collective bargaining agreement. Thus, the rate at which vacation is paid out is often governed by the employer.  For administrative ease, many employers normally choose to pay out accrued vacation leave at the employee's current rate of pay. It is important, however, for employers to check state legal requirements to ensure there is no additional legal obligation. California, for example, requires employers to pay leave at the employee's current rate of pay.

Some employers may choose to pay out vacation leave at the earned rate of pay rather than the current rate of pay. For example, the employee may have earned vacation leave last year, when his or her wage was $10 per hour, but his or her current wage is $12 per hour. An employer may choose to pay out the vacation leave at the earned rate of $10 per hour. In this case, the employer should consider a few points. First, the employer will need to have an established policy that informs employees of all rules regarding paid vacation leave, including the rate of pay. Second, the employer will need to develop a detailed process to track each employee's accrued vacation time and the rate at which it is earned. This can result in a complicated system that requires close monitoring when calculating and tracking different rates of pay. Finally, an employer will need to ensure that the payout policy is administered consistently to all employees.

Employers also may impose restrictions and other conditions regarding vacation payout, and these restrictions should be communicated to employees at the time they begin work (in a number of states it is required). There is a growing body of state laws, statutes and court decisions that govern how employers administer vacation time, including payout upon termination for accrued but unused vacation. Employers should carefully review their state laws to develop a comprehensive policy covering leave eligibility, accrual, carryover, forfeiture, payment upon termination and integration of vacation policy with other state laws.