Enforce use-it-or-lose-it vacation with a clear policy

Issue: How to handle employees' vacation leave left over at year-end or when they leave your employ.

Benefit: A clearly written policy can protect you from disputes and unnecessary compensation.

Action: Review your vacation policy to ensure that it clearly states what happens to unused vacation time. Then, make sure it con- forms with your state's laws.

If you have a vague (or nonexistent) vacation policy, you're simply asking for a lawsuit. That's why it's important to make sure your organization clearly spells out whether employees can roll over their vacation leave from one year to the next. Then, describe the circumstances in which employees will be paid for unused vacation accruals.

If an employee's vacation time goes unused at the end of a year, you need to choose one of three policies:

HR Forms D


  • The accrued leave is forfeited
  • Employees are paid the equivalent in cash.
  • Some or all of the unused time carries over to the next year.


As the following case shows, employees aren't entitled to be paid for unused vacation time if they leave the job, as long as your policy leaves no doubt about that and they aren't covered under an employment contract.

Recent case: After four years on the job, an employee quit and claimed that the company owed him for his unused vacation time. The company's "use-it-or-lose-it" policy prohibited employees from rolling over unused vacation time from year to year.

Still, the employee sued, citing state law that called for all "wages" to be paid upon termination. The employee claimed that his unused vacation pay should be considered wages.

The court tossed out the case, saying that the state's definition of "wages" did not include vacation time. Plus, it said, the company's use-it-or-lose-it policy was crystal clear. (Chrin v. Cambridge Hydro-dynamics Inc., No. A-3610-02T5, N.J.App. Div., 2004)

Final note: If you operate in more than one state, check those states' vacation-policy laws. Some states, such as California, prohibit use-it-or-lose-it policies and may have other rules associated with vacation leave.