California PTO Laws: Payout on Termination and the Use It or Lose It Ban

In California, earned vacation or PTO is wages: when a job ends for any reason, every unused hour must be paid out at the employee's final rate of pay, and a "use it or lose it" policy that wipes out earned time is illegal. Employers can stop the balance from growing with a reasonable accrual cap. Statutory paid sick leave is separate and does not have to be paid out.

The rules below come from Labor Code §227.3 and the Labor Commissioner's (DLSE) guidance, as of 2026.

Does California require employers to offer PTO at all?

No. The Labor Commissioner says "there is no legal requirement in California that an employer provide its employees with either paid or unpaid vacation time." The rules only kick in once you have a policy, practice or agreement to give paid vacation. From then on, the time counts as wages. It is earned, or "vests", as the work is done.

For example, an employee entitled to 10 work days a year has earned five days after six months.

Is use it or lose it legal in California?

No. The DLSE says a policy "that provides for the forfeiture of vacation pay that is not used by a specified date ('use it or lose it') is an illegal policy under California law." Earned vacation "cannot be forfeited, even upon termination of employment, regardless of the reason for the termination."

Calling it PTO doesn't change anything. If you merge vacation and sick days into one PTO bank, the DLSE treats the bank like vacation. PTO is earned day by day, vested days can't be forfeited, the balance can be capped, and unused days must be paid when employment ends.

What you can do instead:

Practice	Allowed in California?
Unused vacation expires at year end	No: it is a forfeiture
Accrual cap (no more accrual above a set balance)	Yes, if reasonable
Paying out unused vacation each year	Yes
Telling staff when they can take vacation	Yes
No vacation accrual during a genuine waiting period	Yes, if it is not a subterfuge
Leaving some groups out, such as part-time staff	Yes, if the policy says so clearly

What is a reasonable vacation accrual cap in California?

The law sets no number. The DLSE accepts a policy where staff stop accruing at 200 hours until their balance drops below that level. A cap is lawful because nothing already earned is taken away. The employee just stops earning more until they use some.

Staff must still have a reasonable time to take their vacation. A cap that is "a subterfuge to deny employees vacation" won't be recognised. The DLSE has repeatedly found that policies requiring all vacation to be taken in the year it is earned, or soon after, are unfair and will not be enforced. Our holiday carry-over and accrual guide explains how caps and carry-over work together.

How is unused vacation paid out when someone leaves?

Labor Code §227.3 requires the employer to pay "all of his or her earned and accrued and unused vacation days" at the final rate of pay, whenever employment ends, for any reason. A collective bargaining agreement can provide otherwise. The DLSE says this pay "must be included in the employee's final paycheck."

For someone who leaves partway through the year, the DLSE prorates the entitlement daily. Its example: an employee with 120 hours a year quits on day 219 (August 7) with nothing taken and nothing carried over. That's 219 ÷ 365 = 60%, or 72 hours. At a final rate of $13.00 an hour, that is $936.00.

Two common mistakes:

• Using an old rate. Payout is at the final rate in effect on the day employment ends, not the rate when the hours were earned.
• Clawing back advanced vacation. If someone took vacation before earning it and then leaves, the employer cannot deduct the unearned days from the final paycheck.

When is the California final paycheck due?

The deadline depends on how the job ends. Accrued vacation is part of the final wages, so it follows the same deadline (Labor Code §§201, 202 and 227.3):

How employment ends	Final pay, including vacation, is due
Fired or laid off	Immediately, at the time of termination
Quits with at least 72 hours' notice	At the time of quitting
Quits without 72 hours' notice	Within 72 hours of quitting

These are the general rules. The DLSE lists special deadlines for some industries, such as seasonal food processing, motion pictures and oil drilling. If an employer wilfully pays late, the waiting time penalty is one day's pay for each day the wages stay unpaid, up to 30 calendar days. Employees can file a wage claim with the Labor Commissioner, and former employees can also claim the waiting time penalty under Labor Code §203.

For how other places handle leftover leave, see being paid for unused holiday when you leave a job.

Does unlimited PTO avoid the payout rule?

Not automatically. In McPherson v. EF Intercultural Foundation (2020), a California Court of Appeal held that §227.3 applied to an employer's "unlimited" policy on the facts of that case. The policy was unwritten, staff were limited in practice, and it was never described to them as unlimited. The court did not decide whether a truly unlimited policy creates vested vacation.

The court's guidance on a policy more likely to hold up:

• It is in writing and says time off is a flexible schedule, not extra pay for work done.
• It spells out the rights and duties of both sides, including what happens if someone never schedules time off.
• Staff get a real chance to take time off in practice.
• It doesn't become a de facto "use it or lose it" policy, or one where some people work long hours and rarely take leave while others take far more.

If you are considering it, read how to run unlimited PTO first.

How is California paid sick leave different?

Paid sick leave is a separate state requirement, and it isn't treated like vacation at separation. Since January 1, 2024, employers must generally provide 5 days or 40 hours of paid sick leave a year. Under the accrual method of one hour per 30 hours worked, an employer can cap use at 40 hours or five days a year and total accrual at 80 hours or ten days. Before 2024 those limits were 24 hours or three days, and 48 hours or six days.

Unused sick leave does not have to be cashed out unless the employer's policy pays it out. If an employee is rehired within 12 months, their accrued sick leave must be restored, unless it was paid out under a PTO policy when they left. Since January 1, 2024, local ordinances can't contradict state law on whether sick leave has to be paid at termination.

If your PTO bank also covers sick days, the whole bank follows the vacation rules above, including payout.

Keeping balances right in Absenca

The payout figure is only as good as the balance behind it. Absenca records accrual, carry-over and every approved request in days, half-days or hours. That gives you an up-to-date balance for each person when someone leaves. Absenca does not calculate pay. Its free plan covers up to 10 people.

FAQ

Can my employer in California take away my unused PTO at the end of the year?

No. Earned vacation and general PTO are wages and can't be forfeited. Your employer can stop you earning more once you reach a reasonable cap, or pay out the unused balance.

Do I get paid for unused PTO if I'm fired in California?

Yes. Earned, unused vacation or PTO is paid at your final rate whatever the reason you leave, and it is due immediately at termination.

Does California require sick leave to be paid out when I quit?

No, unless your employer's policy says so. Statutory sick leave isn't cashed out, but it is restored if you're rehired within 12 months. If sick days are part of a combined PTO bank, the bank is paid out.

Is a vacation cap legal in California?

Yes. The DLSE accepts caps such as 200 hours, as long as staff have a reasonable chance to take their vacation and the cap isn't a disguised forfeiture.

How fast must a California final paycheck include vacation pay?

It is due immediately if you are fired or laid off, and on your last day if you quit with 72 hours' notice. If you quit without notice, it is due within 72 hours.

Rules vary and change. Check the official source, the California Labor Commissioner, before acting on a specific case.