PTO Payout Laws by State: Ensuring Full Compliance with US Requirements

In the United States, there are no federal mandates on paid leave. This means each state has the autonomy to create its labor law as it sees fit. As a payroll manager overseeing multiple branches across the country, navigating different states' laws can be a handful.

However, understanding the laws of each state and using an automated solution can help you avoid conflicts in employee scheduling, and the risk of non-compliance with the PTO laws of your state.

With Deel, you can manage your US and international workers’ PTO, payroll, HR, and more, in one consolidated platform.

In this guide, we’ll walk you through everything you need to know about PTO payout laws by state.

Understanding PTO (paid time off) and payouts

Paid time off (PTO) is a benefit policy that allows employees to step away from work for a specific period and still get paid.

PTO can be used for different purposes, including taking personal time off, going on vacation, taking time to recover from illness, or grieving the loss of a loved one.

Paid time off allows your employees to:

• Take time off work to rest and return with fresh energy
• Handle personal and family emergencies
• Attend to other important affairs without sacrificing their income

For employers, paid time off allows you to:

• Ensure your employees stay productive
• Prevent employee burnout and turnover
• Attract top talent to your company
• Increase employee satisfaction and loyalty and reduce turnovers

The two major types of accrual systems that dictate how you can allocate paid leave to employees include:

• Lump-sum PTO: This policy allows employees to receive a set amount of paid time off at a certain period. This can be at the start of the year or on their work anniversary
• Accrued PTO: Here, paid time off accumulates based on the number of hours the employee works. The more hours they work, the more PTO they earn. For example, an employee can earn 2 hours of PTO when they put in 40 hours of work

Payout vs. no payout: What it means for payroll managers

PTO payouts occur when the employer pays out the value of an employee's unused paid time off. This can happen at the year's end or when an employee leaves the company.

In contrast, no payout PTO occurs when you don’t compensate employees for any unused paid time off. This means employees must use their paid leave before a particular timeframe or they risk losing it. This is also known as the “use it or lose it policy.”

Further reading: What is unlimited PTO?

Federal law vs. state law on PTO payouts

In the US, there is no federal law that mandates employers to provide paid time off to their employees. The Fair Labor Standard Act (FLSA), which governs wage and hour laws, states that employers are not obligated to pay for their workers' paid time off or pay for any unused PTO when employees leave the company.

The Department of Labor gives individual states and employers the autonomy to determine what their PTO policy would look like. Some states make it mandatory for employers to pay their employees the value of their unused time off as wages. In other states, companies are not obligated to do so.

In the next section, we’ll examine the states that require employers to pay upon termination and the ones that don’t allow employers to implement use-it-or-lose-it policies.

State-by-state breakdown of PTO payout laws (2025)

Here’s a breakdown of PTO payout laws by state in 2025:

See also: Supplemental Tax Rates by State (2025)

Use-it-or-lose-it PTO policies

Several US states have enacted regulations prohibiting employers from using "use-it-or-lose-it" policies regarding Paid Time Off (PTO). In these jurisdictions, accrued PTO is considered the employee's earned benefit and cannot be revoked or forfeited. Employers must either allow accrued PTO to carry over to the next year or compensate the employee for unused PTO.

States prohibiting use-it-or-lose-it PTO:

• California
• Colorado
• Montana
• Nebraska

In California, Colorado, Montana, and Nebraska:

• Employers must either permit unused PTO to roll over into the following year or provide compensation for the accrued PTO, typically upon employment termination.
• Employers may impose reasonable limits on the maximum amount of PTO an employee can accrue; however, they cannot eliminate or forfeit accrued PTO solely due to non-use.

In contrast, most other states permit use-it-or-lose-it PTO policies as long as the policies are explicitly stated and clearly communicated to employees.

Employer penalties for late PTO payout upon termination

Employer penalties for failing to pay accrued PTO upon an employee's termination vary significantly by state. These penalties range from additional daily wage payments and substantial fines to possible criminal charges, while some states have no explicit penalties.

States with no explicit penalties

Some states—such as Alabama, Florida, Georgia, Hawaii, Mississippi, South Dakota, Vermont, Virginia, and Washington—have no statutory penalties if PTO payout isn't explicitly required by law or company policy. In these states, PTO payout typically hinges on employer policy.

Important caveats

• PTO payout may be enforceable if explicitly defined in employer policy or contracts, even if not mandated by state law

• Some states treat unpaid PTO as unpaid wages, potentially incurring broader penalties

• Penalties often escalate for willful or repeated violations and may include attorney fees or additional damages

Always consult current state-specific laws directly to confirm penalties and compliance requirements, as statutes and interpretations frequently change.

Common challenges in managing PTO payout compliance

Below are some of the likely challenges you might run into when managing payout compliance for your company:

Challenges by the size of the business

When employees take extended leave, companies typically hire temporary staff to fill in for them. For smaller companies, this may not be an option due to budgetary, resource, or time constraints. As a result, employers might need to enforce a PTO request blackout, whereby some employees aren’t allowed to take time off.

Larger companies, on the other hand, may struggle with finding a system that helps them seamlessly manage a large quantity of PTO requests. Many employers still use outdated methods like physical forms or spreadsheets to track and allocate paid leave. These methods make it difficult to identify trends in time-off usage which can lead to conflicting requests and errors in calculating accrued PTO for each staff.

Technology and system limitations

Since PTO laws vary across states and are always changing, using a payroll system that can’t handle the nuances of state laws on PTO can put you at risk of non-compliance.

For instance, in Illinois, employers who refuse to comply with state regulations on PTO may be required to:

• Pay the amount of wages they owe
• Pay an extra 5% of the fee each month the wages is delayed
• Pay an additional fee of $1,000 USD for unpaid wages above $10,000

To prevent this, you need to consider using payroll solutions that are equipped with built-in compliance safeguard features. A good payroll management tool should provide up-to-date labor regulations on accrual rates, carryover limits, payout requirements, and conditions. Using a tool with these features will help you stay compliant with state law and company policy.

See also: Stay Ahead of Changing Regulations With These 3 Compliance Strategies

Tracking PTO accrual and forfeiture policies

Tracking PTO accruals can be very tricky to navigate. This is because each state's legal requirement on PTO accruals and payout varies, making it hard to ensure compliance if your company is based in multiple states.

Additionally, communicating your company’s forfeiture policies and PTO usage can be a significant administrative burden, especially on lean payroll and HR teams. A PTO tracking solution that provides real-time updates on each employee's PTO balance can automate this process and allow your team to focus on more strategic tasks.

Free Download: PTO Policy Template

Best PTO practices for payroll managers

Implementing a successful PTO policy requires more than understanding each state's laws on paid leave. This section will walk you through some of the best practices for payroll managers to better manage their PTO:

Accurate tracking and documentation

Consider using payroll tracking software to track your employees' accrued PTO while reducing the risks of manual errors. Aside from tracking, you should also keep detailed records of all PTO information such as accruals, employee usage, and payout. This documentation is vital for dispute resolution.

Here are some of the key features you should look out for in PTO tracking:

• A centralized database where you can keep detailed and organized payroll records
• An intuitive portal that gives employees all the necessary information they need to know about their paid leave
• Seamless integration with payroll, time tracking, and other HR software

Regular compliance audits

Periodic audits will help ensure you comply with the latest state laws so you can upate your company’s policy accodingly. When conducting a compliance audit, examine the financial strength of your company, employee benefits, and local legislative changes that impact paid time off. This audit may include a review of:

• State and local laws: Begin by examining current state and local regulations governing PTO, sick leave, and other time-off policies. These laws can vary significantly by location, so ensure your policy complies with each jurisdiction where your employees work
• Financial stability: Assess your company’s financial strength to confirm that your PTO policy is sustainable. Review cash flow, accrual balances, and payout liabilities to avoid overpromising benefits that could strain resources
• Employee benefits alignment: Evaluate how your PTO policy integrates with other employee benefits, such as sick leave, parental leave, and wellness programs. A cohesive approach ensures your benefits package remains competitive and supports employee well-being
• Internal policy consistency: Compare your PTO policy against other company policies to ensure consistency. Misalignment can lead to confusion or disputes, so harmonize your policies to reflect clear and unified guidelines

Transparent PTO policies and communication

As a payroll manager, it’s important to keep employees informed about any updates to your company’s PTO policy. Share changes through email or Slack, explaining what’s new and how it affects them. You can also host a virtual or in-person meeting to share details and hear employees’ thoughts. If you prefer, use an anonymous survey to gather feedback.

Once you’ve implemented new changes in your PTO policies, add them to your employee handbook and share the updated version with your team.

Simplify PTO payout across the US with Deel

To manage employee paid leave, you need to understand your state's requirements to avoid the risk of non-compliance. However, if you’re overseeing multiple branches across the country, it means understanding multiple PTO requirements—which takes time.

Deel PEO takes the weight off your shoulders by ensuring full compliance with payroll requirements across all 50 states in the US, so you can focus on scaling your business. With Deel US Payroll, you can also calculate your payroll taxes and automatically sync your data with your accounting software.

Ready to learn more about how Deel can streamline your PTO process? Book a demo today.