In most states, private sector employers are not required to provide vacation, whether paid or unpaid, to employees. Therefore, employers have significant discretion in developing vacation and personal leave policies that best fit the needs of their workplace and employees.
If promised, vacation must be granted. Nonetheless, it is important for employers to understand that, if their practices, policies, or statements rise to the level of creating a “promise” of vacation, then the employer may create a binding legal obligation to provide vacation—even when state law would not otherwise require it to do so.
Payout of vacation at termination. This caution also applies to obligations to pay out accrued, but unused, vacation time at termination of employment.
Even where state law does not specifically require employers to pay out accrued vacation upon termination, a consistent practice, written policy, or contract promising such payment may create an enforceable legal obligation to do so.
In such circumstances, earned vacation will generally be treated as wages pursuant to state wage payment and collection laws.
The Hawaii Court of Appeals, in Arimizu v. Financial Sec. Ins. Co., 5 Haw. App. 106 (Haw. Ct. App. 1984), ruled that vacation benefits are unpaid wages if the employer says that they are.
Therefore, whether unused vacation must be compensated at termination depends upon what the employer has agreed to, whether explicitly or implicitly a terminated employee is entitled to payment for unused leave only if he or she can show an “express agreement or uniform custom” to that effect (Lim v. Motor Supply, 364 P.2d 38).
For additional information on final wage payments, please see the Paychecks
Clear policy language will control.