Are companies required to pay out vacation time?


Final paychecks often give rise to wage disputes, and an employer’s obligation to pay out accrued vacation time is frequently a part of such complaints. The matter may seem trivial to an employee who has one or two days of unused vacation time, but it can amount to significant values when an employee has accrued several years of unused vacation time. In Arizona, where the minimum wage is now $10.50/hour, it’s not unusual to see cases where a departing employee has over $1,000 in accrued vacation time.

Federal law

Unfortunately, there are no federal laws that require employers to pay out accrued vacation time. In fact, there are no federal laws regarding any aspects of an employee’s final paycheck. As such, final paychecks and any requirement to pay out vacation time are both state matters. You have the right to file a wage complaint with the Department of Labor’s Wage and Hour Division (WHD), but the agency will most likely direct your complaint to the appropriate state labor agency if the issue relates to the final paycheck.

State law

Arizona employment laws don’t require employers to pay out unused vacation time, but they do hold employers accountable for any company policies that relate to the final paycheck. If an employer promises to pay out accrued vacation time in the employee handbook, company manual, employment agreement, or an applicable collective bargaining agreement, the employer is obligated to follow through on that promise. As such, an employee who is promised paid-out vacation benefits on their final paycheck may file a wage complaint against the employer if the company fails to deliver on that promise.

Final paycheck requirements

Although the lack of definitive federal and state laws on the subject leaves the matter of paying out vacation time in a bit of a grey area, Arizona law is much more decisive when it comes to regulations regarding the final paycheck. ARS 23-353 stipulates that an employer must issue the final paycheck to an employee who quits by the next scheduled payday, and to an employee who is terminated (fired or laid off) within 7 working days or the next payday, whichever is sooner. So, if your employer has a written company policy that promises to pay out unused vacation time, you are entitled to receive that on your final paycheck in a timely manner.

What to do when your final paycheck is wrong

If your final paycheck is incorrect, the best initial course of action is to attempt to resolve the matter internally. Even if you aren’t leaving your employer on the best terms, the company’s human resources department should be able to resolve the situation much faster than a government agency or court. Whether you choose to speak with your supervisor or a representative in the human resources department, the communication needs to be in writing. Alert the employer to the mistake, request that the company immediately pay the difference, and attach any necessary documentation or proof to validate your claim.

If your employer refuses to comply with your letter requesting payment of wages due, it’s time to speak with an attorney. An experienced employment law attorney can assess your case, determine the value of any potential damages, and advise you on the best course of action. Depending on your situation, your attorney may recommend that you file a wage complaint with the Industrial Commision of Arizona (ICA) or seek civil action in state court.

How to file a wage complaint in Arizona

In Arizona, wage complaints fall under the jurisdiction of the Industrial Commission of Arizona. To file a claim with the ICA, your claim must be less than $5,000 and unpaid wages can only be considered over the past year. In the context of our discussion on accrued vacation time, that means the ICA may not be able to seek payment for unused vacation time that was earned more than one-year ago, but the agency can demand payment for vacation time earned over the past year if it falls under company policy.

If you choose to file a wage complaint with the ICA, here’s what to expect during the process:

  1. File the complaint by mail or online. You’ll need to include the employer’s name, address, telephone number, a description of the business, the pay period in question, and the amount of wages owed. Note that the ICA cannot accept any requests for confidentiality, so the information you supply on the form—including your identity—may be shared with the employer.
  2. Wait for a response – an agent with the ICA should contact you within 5 business days to assign a claim number and provide instructions on how to submit any documents relevant to your claim.
  3. The ICA will launch an investigation – once the ICA validates your claim, the agency will launch an investigation into the employer.
  4. The ICA will demand payment – assuming the investigation substantiates your wage complaint, the agency will issue a letter to the employer demanding payment for unpaid wages on your behalf. If the employer fails to respond or comply within 10 business days, the ICA will also demand damages of up to 2x the unpaid wages (for a grand total of 3x the amount of unpaid wages).

Pursuing civil action against an employer for unpaid wages

If your wage claim is larger than $5,000 or includes unpaid wages from more than one year ago, your attorney may recommend filing a civil lawsuit against the employer in state court. Depending on the amount of unpaid wages and the associated damages, your attorney will file the suit in small claims court or with the superior court of Arizona.

The litigation process will likely take longer than an ICA investigation, though most successful wage claim cases end in a settlement agreement rather than going through the full court system. Pursuing civil action also has the potential to award greater damages than what you’ll typically receive from an ICA investigation, as ARS 23-355 entitles employees to liquidated damages of up to 3x unpaid wages.

Call our Employment Law team at (480) 464-1111 to discuss your case today.

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