Carrying over and buying leave in the United States
Reviewed by Mellow Editorial Team, HR & payroll content team
There is no federal law in the United States that requires employers to provide paid vacation, allow employees to carry it over, or pay out unused leave when someone leaves. Whether you can roll over unused days, cash them out, or lose them entirely depends almost entirely on your state law and your employer's written policy.
What federal law does (and does not) say
The Fair Labor Standards Act sets rules on minimum wage and overtime but says nothing about vacation accrual, carryover, or payout. The Family and Medical Leave Act guarantees unpaid, job-protected leave for qualifying events — it does not create a paid leave entitlement.
There is no federal statutory paid annual leave or sick leave. This means employers are legally free to offer generous PTO, a modest bank of days, or nothing at all. Once an employer chooses to offer leave, however, the terms of that policy become a legal commitment, and several states regulate what happens to accrued but unused time.
How carryover works in practice
Most employers set one of three models:
Unlimited carryover. Unused vacation rolls into the next year without a cap. Employees like this; employers sometimes find it creates large accrued liability on the balance sheet.
Capped carryover. Employees can carry forward up to a set number of days — often five to ten — and forfeit anything above that cap. This is the most common approach.
Use-it-or-lose-it. All unused vacation expires at year-end or on a fixed date. This model is straightforward to administer but is illegal in some states.
California, for example, treats accrued vacation as earned wages. Employers in California cannot take away vacation an employee has already earned, so a hard use-it-or-lose-it policy is not permitted there. Colorado takes a similar position. In states without such protections, use-it-or-lose-it is generally enforceable as long as employees received clear written notice of the policy.
If you operate across multiple states, you may need different carryover rules for different employee groups — your California headcount cannot be subject to the same forfeiture policy as your Texas employees.
Buying and selling leave
Leave-buying programs — where employees exchange a portion of their salary for additional paid time off — are a voluntary benefit that some employers offer, typically through an annual enrollment window.
There is no federal requirement to offer this, and there is no federal rule prohibiting it. The main compliance consideration is payroll: when an employee gives up salary in exchange for leave, that reduction needs to be structured carefully to avoid unintended consequences. For exempt employees, salary deductions that drop pay below the applicable minimum salary threshold can jeopardize their exempt status under the FLSA. Any buy-sell arrangement should be documented in a written plan with a formal enrollment period, not handled informally.
From a tax perspective, the value of additional leave purchased through a salary-reduction arrangement is generally treated as a pre-tax benefit under a Section 125 cafeteria plan, if your benefits structure qualifies. Leave purchased outside a formal cafeteria plan is typically treated as after-tax compensation. Work through the details with a benefits attorney or CPA before launching a program.
Payout at termination
When an employee leaves, whether accrued vacation must be paid out depends on state law and your written policy.
States such as California and Colorado require payout of all earned, unused vacation at the final rate of pay — no exceptions for resignation versus termination. Other states, including Texas and Florida, treat vacation payout as a matter of contract: if your policy says you pay it out, you must; if your policy says you do not, you generally do not have to, as long as the policy was communicated clearly.
A few states fall in between, requiring payout in some circumstances but allowing forfeiture in others. Because the rules vary so much, the safest approach is to draft your PTO policy with your specific operating states in mind, state your payout rules explicitly, and make sure every employee receives and acknowledges the policy in writing.
Keeping your policy airtight
Whatever carryover or buy model you choose, the written policy needs to answer four questions clearly:
1. How much leave accrues, and at what rate?
2. Is there a carryover cap, and when does unused leave expire?
3. Will unused leave be paid out at termination, and under what conditions?
4. Is there a leave-buying option, and if so, how is it administered?
Review your policy whenever you expand to a new state. State legislatures have become increasingly active on paid leave requirements — several states now mandate paid sick leave, and the landscape continues to shift. Staying current on state-level changes, particularly if you have a distributed workforce, is as important as getting the initial policy right. You can see how multi-state payroll administration works in practice in how Mellow runs payroll across six countries.
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