‘Use-it-or-lose-it’ vacation policy usually legal, but check state law
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: the accrued leave is forfeited; employees are paid the equivalent in cash; or some or all of the unused time carries over to the next year.
As the following ruling shows, unless employees are covered under an employment contract that states differently, they aren't entitled to be paid for unused vacation time if they leave the job, as long as your policy leaves no doubt.
Recent case: After four years, an employee quit and claimed the company owed him for his unused vacation time. His employer's "use-it-or-lose-it" policy didn't allow employees to roll over unused vacation from one year to the next.
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.
But the court tossed out the case, saying vacation time wasn't part of the state-law's definition of "wages." Plus, it said, the company's use-it-or-lose-it policy was crystal clear. (Chrin v. Cambridge Hydrodynamics Inc., No. A-3610-02T5, N.J.App.Div., 2004)
Final note: If your business operates in more than one state, check the state's vacation-policy laws. Some states, such as California, prohibit use-it-or-lose-it policies and may have other rules associated with vacation days.