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Vacation Pay at Termination: What’s your Policy?

For many employers, the summer season brings with it an increase in employee vacations. With that in mind, now may be a good time to re-visit vacation pay policies as they pertain to employee separation. In particular, how does your company handle accrued, but unused, vacation pay at the time of separation?

Kentucky’s wage statutes expressly require employers to pay, in full, all “wages or salary earned” at the time of separation.  KRS 337.055.  The term “wages” includes “any compensation due to an employee by reason of his or her employment, including…vested vacation pay.”  KRS 337.010.  In order to know how much vacation pay must be paid at separation, it is therefore necessary to determine how much of an employee’s vacation pay has “vested.”

Based on the interplay of those two statutes, failing to include language in your employment policy addressing vesting could force you to have to litigate the issue should the employee sue to recover unpaid vacation benefits.  The best approach, therefore, is to specifically define when and how vacation pay vests.  An employment policy should articulate that annual paid vacation is earned as labor is performed throughout the year, and therefore “vests” as it is earned.  This ensures that an employee who has only worked for part of the year at separation will receive only the proportionate share of his or her vacation pay.  Considering that Kentucky courts have consistently held vacation pay to be a matter of contract between employers and employees, it may be a good idea to have employees sign an acknowledgment of the vacation pay policy.

As always, consulting your attorney and HR professional before making any changes is advisable.

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This article does not constitute legal advice.

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