PTO Policy Lawsuit: Are You Making These 3 Costly Mistakes?

It’s one of the first things you do when you want to be a great employer. You create a thoughtful, generous Paid Time Off policy. It feels good, right? You’re giving your team the flexibility they deserve.

But here’s the thing… that generous paid leave policy might be a huge compliance trap.

It’s one of those tough lessons you learn the hard way... or you can learn in my US payroll certification course. It’s what I call the PTO paradox: the federal government doesn’t actually require you to offer paid time off. But the moment you do decide to offer it, a whole mess of state and local rules kick in. These common mistakes are just one aspect of building a comprehensive PTO policy. For a complete walkthrough, see our [Ultimate Guide to Creating a Compliant PTO Policy].

Your voluntary perk just created a mandatory compliance burden. And that distinction is where the risk hides. It’s a classic payroll problem—a good intention that paves the road to penalties and headaches.

I’ve seen it happen more times than I can count. A well-meaning company gets tripped up by a tiny detail they never even knew existed. So, let's talk about a few of the most common PTO errors that can turn your best-laid plans into a costly mess.

Common PTO Error #1: The Final Paycheck Fumble

This one is incredibly common. An employee resigns, and you know you need to pay out their unused vacation time because that’s what your handbook says. You process it in the next regular pay cycle. Simple.

Except… it’s not.

Many states have specific PTO payout laws that consider accrued vacation to be part of an employee’s final wages. And those states often have very strict rules about when final wages must be paid—sometimes as early as their last day of employment. Your payment, which felt timely to you, was actually a week late according to the law. And that tardiness comes with automatic penelties.

Pro-Tip: Create a simple termination checklist. One of the first items should be: "Check state law for final pay deadlines." If the terminating employee is in a state like California, Colorado, or Massachusetts, it’s an immediate red flag to ensure their PTO payout is handled on their last day, not in the next pay run.

Common PTO Error #2: The "Use-It-or-Lose-It" Illusion

"Use-it-or-lose-it" policies feel straightforward. If employees don't use their vacation time by the end of the year, they forfeit it. This encourages people to actually take breaks, which is a good thing.

But a "use it or lose it" PTO policy isn't legal everywhere.

In places like California, Nebraska, and Montana, for example, accrued vacation time is treated like earned wages. And you can't just take away someone's wages. In these states, this kind of policy is illegal. You either have to let the time roll over or pay it out. If your policy doesn't align with state law, you could be on the hook for back pay for every employee who ever lost a day of vacation.

How to Fix It: Do a quick audit. List all the states where you have employees and check them against states that ban "use-it-or-lose-it" policies. If there's an overlap, you need to update your handbook immediately to either allow for rollover (sometimes with a cap) or ensure you're paying out unused time where required.

Common PTO Error #3: The Inconsistency Nightmare

This final trap isn't always in the handbook; it's in how the policy is applied. These are the paid leave policy mistakes that come from practice, not just writing.

Let's say a manager lets their favorite team member take an extra unearned vacation day, but denies the same request from someone else a month later. On the surface, it’s just inconsistent management. But in the world of HR and payroll, it’s a potential discrimination claim.

When PTO isn’t administered consistently and fairly, it can look like you’re favoring certain employees based on protected characteristics. The policy has to be the policy for everyone. Without a clear, documented system for requests, approvals, and tracking, you’re leaving your company exposed.

How to Fix It: Standardize your process. All PTO requests should go through a single, official channel—like your HRIS or payroll software. This creates a documented, time-stamped record of every request and approval, making the process fair and defensible. It removes the "he said, she said" risk and ensures the policy is applied the same way for everyone.

Turning Anxiety into Confidence

So how do you offer a great benefit without constantly looking over your shoulder?

It’s not about memorizing every single state regulation. It’s about building a bulletproof system. A system that includes clear documentation, regular audits of your policies, and a rock-solid process for handling things like final pay.

This is the kind of real-world stuff we dive into. It’s about moving past the fear of "what if" and getting to a place of confidence, knowing that your payroll practices are not just generous, but also compliant. You can protect your company and take care of your people. You just have to know the rules of the game.