Can My Employer Have a Use-It-or-Lose-It PTO Policy in California?

No. Use-it-or-lose-it PTO policies are illegal in California. Once you earn PTO or vacation time, it's yours. Your employer cannot take it away at the end of the year, on your work anniversary, or at any other arbitrary deadline. If they've been doing this, they owe you for every hour they forfeited.

Why California Is Different

In most states, employers can require employees to use vacation by a certain date or lose it. California is not most states. The DLSE (Division of Labor Standards Enforcement) treats accrued vacation and PTO as wages. Under Labor Code Section 227.3, once vacation time vests, it cannot be forfeited. It's earned compensation, the same as your paycheck. Your employer can't take back last month's salary, and they can't take back last month's PTO.

This applies to all California employers regardless of size, industry, or how they structure their time-off policies. It doesn't matter what your employee handbook says. It doesn't matter what you signed when you were hired. A policy that forfeits earned PTO is unenforceable.

Accrual Caps Are Legal. Forfeiture Is Not.

Here's where it gets tricky, and where employers get creative. California does allow employers to set a reasonable cap on PTO accrual. A cap means you stop earning new PTO once your balance reaches a certain threshold, until you use some. A common example: your policy gives you 160 hours per year, with a cap at 240 hours. Once you hit 240, you stop accruing new hours until your balance drops below the cap.

That's legal. You keep everything you've earned. You just don't earn more until you use some. The key difference is that nothing disappears from your balance. Compare that to a use-it-or-lose-it policy where 80 hours vanish on January 1st. One is a pause in accrual. The other is wage theft.

Some employers set the cap unreasonably low, essentially forcing employees to use PTO faster than they'd like or lose the ability to accrue. A cap of 1.25 times the annual accrual rate is generally considered reasonable. A cap that equals the annual accrual rate may be so low that it functions as a forfeiture policy in disguise.

"Unlimited PTO" and the Payout Trap

A growing number of California companies, especially in tech, have adopted "unlimited PTO" policies. The pitch sounds generous: take as much time as you need, no tracking, no accrual. The reality is often less generous than it appears.

If there's no accrual, there's no balance to pay out when you're terminated. That's the business reason most companies adopt unlimited PTO. It eliminates the payout liability entirely. A company with 500 employees carrying an average of 80 accrued PTO hours each has a payout liability of roughly $1.5 million. Unlimited PTO makes that number zero.

But here's the catch. If your employer calls it "unlimited" but actually tracks usage, limits how much you can take, or discourages time off, it may not be truly unlimited. The DLSE looks at how the policy works in practice, not just what it's called. If you had to request approval, if there was an unwritten expectation about how much time was acceptable, or if your manager pushed back on requests, an argument exists that this was a traditional accrual policy with an unlimited label.

Year-End Resets and Other Disguised Forfeiture

Watch for these common variations that are all illegal in California:

Year-end reset. "All unused PTO resets to zero on January 1." This is textbook forfeiture. Illegal.

Anniversary reset. "Unused PTO expires on your hire date anniversary." Same thing with a different calendar. Illegal.

Partial forfeiture. "You can roll over up to 40 hours. Anything above that is forfeited." The rollover portion is fine. The forfeiture of hours above 40 is illegal. Those hours were earned and cannot be taken away.

Front-loaded forfeiture. Some employers grant a lump sum of PTO at the start of the year rather than accruing it over time. If unused front-loaded PTO is forfeited at year-end, the analysis gets more complex. The DLSE has taken the position that front-loaded time that can be used for vacation vests immediately and cannot be forfeited, though employers sometimes argue otherwise.

What This Means for Your Severance

If your employer has been running an illegal use-it-or-lose-it policy, you may be owed significantly more than your current PTO balance shows. Every hour that was improperly forfeited is a wage claim. If you lost 40 hours every January for five years, that's 200 hours of PTO your employer took from you.

When you're negotiating a severance agreement, this matters. A lot. Your employer is asking you to release all claims, including wage claims for forfeited PTO. Those claims have real value. Don't sign a release without understanding what you're giving up.

The combination of forfeited PTO plus waiting time penalties for any unpaid balance at termination can add up to tens of thousands of dollars. That's leverage in a severance negotiation, and it often results in a significantly better package.

What to Do

Pull your records. Check old pay stubs and employee handbook versions. Look for any PTO that disappeared at year-end or on your anniversary date. Each forfeited hour is a potential wage claim.

Calculate the total. Add up every hour of PTO that was taken from you. Multiply by your current hourly rate (or the rate at the time of forfeiture, whichever is higher). That's the starting point for what you're owed.

Don't raise it with HR. If you're also negotiating a severance, save this for the negotiation. A forfeited PTO claim is a card you want your attorney to play at the right time, not something you tip off to HR before the severance discussion starts.

If your employer has been forfeiting your PTO and you're now reviewing a severance agreement, our California employment attorneys can evaluate the full picture. The forfeited PTO claim changes the math of the entire negotiation. Free consultation.

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