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This post uses hypothetical scenarios for illustrative purposes only. It does not describe any actual client, transaction, or representation, and is not legal advice.

A common 2026 startup pattern looks like this: a Florida-headquartered company hires wherever the talent is, so a few engineers sit in California, a salesperson works from Denver, and an account manager is in Chicago. The handbook was written in Jacksonville, and it says what most Florida handbooks say — unused PTO does not roll over, and nothing is paid out when you leave. The payroll platform quietly accrues hours for everyone anyway. Someone resigns, the final paycheck covers wages through the last day, and months later a state labor agency notice arrives asking for the accrued balance plus penalties. The founder pulls up the handbook, points to the forfeiture sentence, and learns that in the employee’s state that sentence is void.

Accrued paid time off is one of the most under-managed liabilities on a small company’s books. It is small per employee, invisible in the P&L until someone leaves, and governed by a state-by-state patchwork that has nothing to do with where the company is incorporated or headquartered. Here is how the patchwork works, where Florida sits in it, and how to draft a policy that survives contact with the strict states.

In California, vacation is a wage and forfeiture is void

California Labor Code § 227.3 provides that when an employment contract or policy offers paid vacation and the employee is terminated without having taken it, all vested vacation must be paid as wages at the employee’s final rate of pay — and that a policy “shall not provide for forfeiture of vested vacation time upon termination.” The California Supreme Court read that statute in Suastez v. Plastic Dress-Up Co. (1982) 31 Cal.3d 774 to mean vacation is deferred compensation that vests pro rata as work is performed. Once vested, it cannot be taken away. A “use it or lose it” clause is therefore unenforceable in California, and the Labor Commissioner’s own says so in plain terms.

Three things remain permissible, and they are the building blocks of a compliant California policy. First, a reasonable cap on accrual: once an employee reaches the ceiling, accrual pauses until time is used. That is a limit on future earning, not a forfeiture of what has been earned, and Boothby v. Atlas Mechanical, Inc. (1992) 6 Cal.App.4th 1595 confirmed it. Second, a waiting period before accrual begins for new hires, so long as no vacation is actually earned during that period — Owen v. Macy’s, Inc. (2009) 175 Cal.App.4th 462 upheld a policy that provided no vacation for the first six months of employment. Third, a genuinely unlimited policy can fall outside § 227.3, but McPherson v. EF Intercultural Foundation, Inc. (2020) 47 Cal.App.5th 243 shows how that goes wrong: the policy there was “unlimited” on paper but was administered as an undocumented, roughly fixed allotment, and the court treated it as accrued vacation that had to be paid out. The court suggested that a policy which is clearly written, expressly says time off is not additional wages, gives employees real flexibility to take time off, and is administered fairly may be treated differently — but “unlimited” is not a magic word.

Two more California points catch out-of-state employers. A combined PTO bank that mixes vacation and sick leave is treated entirely as vacation, so the whole balance is payable at separation, whereas separately designated sick leave under Labor Code § 246 does not have to be paid out. And because vacation is a wage, the final-pay timing rules and waiting-time penalties of §§ 201 through 203 apply to it — which is how a modest balance turns into a claim several times its size. That penalty math gets its own treatment in our companion post on final-paycheck timing and waiting-time penalties.

Florida sits at the other end of the spectrum

Florida has no statute requiring payout of accrued vacation, no state agency that adjudicates ordinary wage claims, and no final-paycheck deadline beyond the next-regular-payday practice most employers already follow. Whether unused PTO is owed at separation is a matter of contract: the written policy, the offer letter, or the employment agreement controls. A clear written statement that unused PTO is forfeited on separation is generally enforceable here. The risk in Florida runs the other way — a policy that is silent on payout, or that describes PTO as “earned,” invites the argument that the balance is compensation due under the agreement, and Florida Statutes § 448.08 lets a prevailing employee recover attorney’s fees in an action for unpaid wages, so a two-thousand-dollar dispute can carry five-figure fee exposure. Florida also generally preempts local governments from imposing their own leave mandates, so the analysis is state law plus your own documents. Silence, not strictness, is the Florida trap.

The middle of the country is a patchwork

Between those poles, states sort roughly into three groups, and the boundaries shift, so treat this as a map rather than a survey. The first group treats earned vacation as wages that cannot be forfeited: California is the best known, and Colorado joined it decisively in Nieto v. Clark’s Market, Inc., 2021 CO 48, where the Colorado Supreme Court held that vacation pay, once earned, is wages under the Colorado Wage Claim Act and a “use it or lose it” forfeiture is void. Illinois, Massachusetts, Montana, Nebraska, Louisiana, and Rhode Island (after a year of service) sit in or near this group, though some of them tolerate a use-it-or-lose-it rule if employees get clear notice and a reasonable opportunity to actually take the time. The second group lets the employer’s policy govern, but only if the policy says so clearly and in writing — New York and North Carolina are the classic examples, and a policy that is silent defaults to payout. The third group, which includes Florida, Texas, and Georgia, largely defers to the policy or agreement. The practical rule for a multi-state employer is that the employee’s work state controls, not the company’s charter state, and the strictest state in your footprint effectively sets the floor for how carefully you draft.

Why founders keep missing it

The pattern is not carelessness so much as defaults. Remote hiring outruns the handbook — the policy was written for one state and never revisited when the third or fourth state was added. Payroll and HRIS platforms accrue PTO from a single template, and the platform does not know or care that a California employee cannot forfeit what it is accruing. Professional employer organizations handle a great deal, but the policy language is still yours, and a PEO’s default handbook is not a substitute for state addenda. Balances are rarely reconciled to the policy, so a “no rollover” sentence lulls everyone while the system keeps counting. And the claim can arrive months later, well inside the state’s limitations period, with penalties attached — at which point the handbook sentence that felt like protection turns out to be the exhibit that proves the company had a policy it could not lawfully apply.

What a policy that holds up looks like

First, split the document. Keep a base policy and add state addenda for every state where you have employees; the California addendum removes any forfeiture language, replaces it with an accrual cap (caps in the range of one and a half to two times the annual accrual are commonly used), and states that vested, unused vacation is paid at the final rate on separation. Second, decide deliberately whether you offer vacation, a combined PTO bank, or vacation plus a separate sick bank. In California the separate sick bank avoids paying out sick time; a combined bank does not. Third, define the accrual method — per pay period, per hour worked, or front-loaded — and make sure the payroll platform is actually configured that way, state by state, because the platform’s balance is what a hearing officer will look at. Fourth, if you want unlimited PTO, draft it to the McPherson signals: no accrual, no bank, an express statement that time off is not additional compensation, and a real, documented practice of people taking time off; if managers quietly enforce a number, you have an accrual plan with extra risk. Fifth, reconcile balances quarterly and at every departure, and carry the accrued liability on the balance sheet the way your auditors will want it carried. Sixth, build a final-pay checklist that includes a state-specific PTO line, and pay what the state requires by the state’s deadline, because in the strict states the timing is a separate violation with its own penalty.

Where this shows up in a deal

Buyers find this liability even when founders don’t. Accrued PTO is a standard line in the diligence request list, it is frequently treated as a debt-like item or a working capital adjustment, and the wage-and-hour representation in the purchase agreement will ask the seller to warrant that all accrued vacation has been paid or properly accrued in accordance with applicable law. In an asset sale the seller’s employees are technically terminated at closing, and in a state like California that can trigger payout of vested vacation at closing unless the deal documents handle the assumption carefully — one of several employee-side transition issues worth pricing before the letter of intent rather than after, alongside Florida-specific items like E-Verify compliance. None of this is difficult once it is on the list. It is expensive only when it is discovered by the other side. And if a claim is already pending in another state, bring in counsel admitted there — the point of getting the policy right is to keep that call from being necessary.

If you are building or cleaning up a PTO policy for a multi-state team, or you have received a claim over an unpaid balance, feel free to reach out to our firm manager, Magda, at Magda@montague.law, or fill out our contact form. Mention you read this post.