Paid Time Off (PTO) Compliance

Overview

California law does not require employers to provide vacation or PTO. However, once an employer chooses to offer PTO, it becomes legally protected wages, and strict rules apply. If PTO is mishandled, employers can face waiting time penalties, wage claims, and class or PAGA exposure.


Vacation Is Considered Wages

In California, vacation/PTO is treated as wages. Vacation is earned as work is performed, not when the employer chooses to grant it. Once earned, PTO belongs to the employee.

Example: If an employee earns 10 days of PTO per year, they earn about 5 days after six months.



Accrual of PTO

PTO must accrue over time based on the employer’s written policy.

Employers may choose how accrual works, as long as it is:

  • Clearly stated in writing

  • Applied consistently

  • Non-discriminatory

Common accrual methods include per pay period, monthly, or annually.


Example – Monthly Accrual

An employee earns 12 days per year → 12 ÷ 12 months = 1 day per month


Example – Bi-Weekly Accrual

An employee earns 24 hours per year → 24 ÷ 26 pay periods ≈ 0.92 hours per pay period

Employees must be told how PTO is earned and tracked.


Caps on PTO Accrual

Employers may set a reasonable cap on how much PTO an employee can accrue.

Example

  • Employee earns 5 days per year

  • PTO cap is 15 days

Once the cap is reached, accrual pauses until PTO is used.

Important

  • Caps must be clearly written

  • Employees must have a real opportunity to take time off

  • Caps cannot be used to quietly prevent PTO use


PTO Policy Red Flags (Avoid These)

The following PTO practices frequently lead to wage claims in California:

  • “Use-it-or-lose-it” policies

  • PTO that disappears at year-end

  • Policies allowing PTO forfeiture at termination

  • Vague accrual rules employees don’t understand

  • Accrual caps that employees can never realistically reduce

If your policy includes any of the above, it should be revised.


“Use It or Lose It” Is Illegal

California does not allow vacation forfeiture.

Because PTO is treated as wages:

  • Earned PTO cannot expire

  • Earned PTO cannot be taken away

  • Earned PTO must be paid out at termination

This applies to all employees, regardless of the reason for separation.


PTO Payout at Termination

When an employee quits or is terminated, the employer must pay all earned and unused PTO at the employee’s final rate of pay.

This amount must be included in the final paycheck, per California Labor Code § 227.3.

Exception: This requirement does not apply only if a valid collective bargaining agreement lawfully provides otherwise.

Example – PTO Payout at Termination

  • Annual PTO entitlement: 120 hours

  • Separation date: August 7 (≈ 60% of the year)

  • PTO used: 0 hours

  • Final rate of pay: $20/hour

Calculation

  • 60% × 120 hours = 72 hours earned

  • 72 × $20 = $1,440 owed at separation

Waiting Periods & Delayed Accrual

Employers may delay when PTO begins accruing, such as during a probationary period, if the policy is legitimate and clearly stated. Once accrual begins, PTO must accrue normally and cannot be forfeited.


Example

  • Employees begin accruing PTO after 6 months of employment.


Employer Control Over PTO Use

Employers may set reasonable rules for when PTO can be used, including:

  • Advance notice requirements

  • Blackout periods during peak business times

  • Limits on how many employees may be off at once

Employers cannot:

  • Prevent employees from ever using PTO

  • Use scheduling rules to erase earned PTO

Key Takeaways

  • PTO is optional, but once offered, it becomes earned wages

  • Earned PTO cannot be forfeited

  • Accrual caps are allowed if reasonable and clear

  • Unused PTO must be paid out at termination

  • A clear written policy is the employer’s best defense