Labor Law and the Payment of Vacation Time
The Fair Labor Standards Act, which the U.S. Department of Labor administrates, does not require employers to give employees vacation time -- it is a matter between the employer and the employee. Though state law does not require vacation time, if the employer chooses to give paid vacation time, the state may have policies concerning its payment.
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Criteria
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If the employer has an established practice, policy or agreement to give paid vacation time, the state may put restrictions on how the employer should establish the plan. The state of California, for example, says vacation pay adds up as it is earned. Employers should put a reasonable limit on vacation benefits that stops an employee from accruing vacation time once she has reached a certain amount of hours or days. Employers are required to establish a valid and logical policy, such as no vacation during the first year of employment, two weeks after the second year, three weeks after the third year, four weeks after the fourth and consecutive years.
Payment
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The state may list certain information that should be included in the vacation payment policy. The state of Texas, for example, requires the employer to specify the categories of workers who qualify for vacation pay, such as full-time or part-time, and the company's definition of such pay groups. The policy should include the vacation rate of payment, whether employees can carry unused vacation time over to the next year, whether they are paid for accrued vacation time when they terminate, how vacation time is earned (such as monthly, by pay period or length of service), and the criteria for unused vacation time during layoffs or other work separations.
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Termination
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State law may require the employer to follow its vacation procedures regarding terminations. For example, in Texas, if company policy states that an employee who quits must give at least two weeks' notice to receive unused vacation time, the employee must give the required notice to receive her vacation payout and the employer must follow the policy exactly. Vacation payout is not enforceable under Texas law if the policy does not state what happens to unused vacation time when the employee terminates. Under California law, vacation time cannot be forfeited, even when the employee terminates, regardless of the cause of termination. The state may have laws as to when the terminated employee should receive her vacation payout, such as with her final paycheck.
Considerations
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The IRS, which administers federal payroll tax withholding laws, and the state regard paid vacation time as wages. Therefore, vacation time is taxable income, subject to federal income tax, Medicare tax, Social Security tax and applicable state, city and/or local income taxes.
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