Important Business Alert: Corporate Transparency Act (CTA) Effective January 1, 2024 CLICK TO LEARN MORE
HR Legal insider Blog Banner

PTO: Use It Or Lose It!

Do employers in Iowa, Nebraska and South Dakota have to pay out earned PTO, or can their policies allow for forfeiture?

Jeana Goosmann’s Vistage group recently encountered this question and if these business owners want to know, we bet you do to!  It’s your employee’s last day—are they walking out with just their wages for the last pay period, or are they getting a big, fat PTO check? This depends on your company’s policies or past practices, and, in some cases, the state where the employee is working. While neither state requires private employers to offer paid vacation, Iowa, Nebraska and South Dakota have differing requirements as to vacation payout upon termination, so even just across state lines your company must be aware of the jurisdiction in which it is operating.

Iowa employers must follow their policies or contract. Other than a couple general restrictions, Iowa is fairly laissez faire regarding how employers handle earned but unused leave when an employee leaves. If you have a written vacation/PTO policy, or have a historical way of handling paid leave, you must treat each employee the same under that paradigm. Consistency is key. Similarly, if the employee signed a contract which has language about paid leave, your company must follow the terms of the contract. Otherwise, it is up to the company to decide, and a policy whereby a departing employee forfeits any earned but unused leave is acceptable. Takeaway: If it’s in writing, follow it to the letter; otherwise, just be sure to treat everyone equally.

Nebraska employers MUST pay out earned but unused PTO. Wage and hour issues in the Cornhusker State are governed by the The Nebraska Wage Payment and Collection Act. The Act was modified in 2007 after a landmark case in 2006, Roseland v. Strategic Staff Management, Inc., held that a provision in Strategic Staff Management’s employee handbook which stated that employees would not be paid for unused vacation leave upon termination conflicted with the Act as then written. The 2007 revision clarified that employers in Nebraska are required to pay out earned but unused vacation time when an employee leaves the company.

But what about PTO time that includes vacation and sick pay? Did the employer have to pay both out at termination? Just vacation pay?  The 2007 clarification was a little too murky for some, and it led to more litigation. In 2013, the Nebraska Supreme Court, in Fisher v. Payflex Systems USA, held that “paid time off” was equivalent to “vacation leave” under the Act. This decision was based on prior Nebraska case law to the effect that “vacation pay is generally regarded as additional wages for services performed…. it is more like a contracted-for bonus for a whole year's work” as compared to sick leave, which must be based on an event (the illness).

So how should Nebraska employers handle the issue? In order to be in compliance with The Nebraska Wage Payment and Collection Act, companies in Nebraska must pay separating employees for any earned but unused vacation time, regardless of whether those hours are in a combined PTO fund with sick leave or if they are counted separately. Where vacation and sick leave are blended, the whole combined pool constitutes wages and must be paid out at termination.

Moral of the story: Either have separate banks for your employee’s vacation and sick leave, or be prepared to pay out all combined PTO.

For those of you in South Dakota, South Dakota is the least regulated of the tri-state area as far as PTO payout is concerned. Like Iowa and Nebraska, there is no state law requiring an employer provide paid vacation; in South Dakota, though, there is not even a statute addressing vacation pay. As in Iowa, employers in South Dakota should adhere to any policies, procedures, or contract language which address paid leave. Otherwise, your company has discretion to pay or not pay earned but unused leave time at termination.

If you need help drafting or revising your company’s leave policy for Iowa, Nebraska or South Dakota employees, reach out to Jeana Goosmann, Managing Partner of the Goosmann Law Firm today at (855) 909-4442. We have employment law attorneys that can help your business!