US Pay, Overtime and Final Paychecks

There is no federal law requiring employers to pay out unused PTO or vacation time when employment ends. The rules are entirely governed by state law — and they vary dramatically. In some states, accrued vacation is treated as earned wages that cannot be forfeited under any circumstances. In others, the employer's written policy controls, including use-it-or-lose-it provisions.

States that generally require vacation payout include California, Colorado, Illinois, Louisiana, Massachusetts, Minnesota, Montana, and Nebraska. In California, for example, accrued vacation is definitively treated as earned wages under the Labor Code — employers cannot implement use-it-or-lose-it policies, and all accrued, unused vacation must be paid on the last day of employment regardless of why employment ended.

In states without a mandatory payout rule, your employer's written PTO or vacation policy governs. Read your employee handbook carefully — if the policy says unused PTO is forfeited on termination, that provision is likely enforceable in your state. If the policy is silent on payout, you may have a stronger argument that the accrued balance is owed. When in doubt, contact your state's department of labor.

Severance pay is fully taxable under US federal law. The IRS treats severance as supplemental wages — meaning it is subject to federal income tax withholding, Social Security tax (6.2% on earnings up to the annual wage base), and Medicare tax (1.45%, or 2.35% above $200,000). State income tax also applies in most states. There is no US federal equivalent of the UK's £30,000 tax-free termination payment threshold.

Because severance is often paid as a lump sum, the withholding can be jarring. Employers typically withhold federal income tax on lump-sum supplemental wages at either the flat supplemental rate (22% for amounts up to $1 million, 37% above that) or by aggregating the payment with your regular pay and withholding at the corresponding rate. The actual tax you owe is settled when you file your annual return — you may owe more or receive a refund depending on your total income for the year.

One exception: if severance is paid as a result of a qualifying employment claim or lawsuit (rather than as a standard exit payment), some portion may be characterised differently for tax purposes. Payments for physical injuries or sickness may be excludable from gross income. Non-physical damages are generally taxable. Always consult a tax advisor if your severance was received as part of a legal settlement.

Withholding a final paycheck is unlawful in all 50 states, regardless of the reason for separation. An employer cannot withhold your final wages because you failed to return equipment, gave insufficient notice, or are involved in a dispute. The final paycheck must include all wages earned through your last day of work, including regular pay, overtime, and any accrued vacation or PTO that your state requires to be paid out.

Deadlines for the final paycheck vary by state and by how employment ended. In California, if you are fired or laid off, your employer must pay your final wages on your last day of employment — immediately. If you resign with at least 72 hours' notice, payment is also due on the last day; if you resign without notice, it is due within 72 hours. Other states are less strict: some require payment by the next regular payday, others within a set number of days (typically 3–14 business days).

If your employer withholds your final paycheck, file a wage claim with your state's department of labor as soon as possible. You may be entitled to waiting time penalties (in California, for example, up to 30 days' worth of wages if the employer willfully fails to pay), interest, and attorney's fees. You can also sue in small claims court for amounts within that court's jurisdictional limit. Do not sign any release of claims in exchange for receiving wages you were already owed.

The Fair Labor Standards Act (FLSA), enacted in 1938, is the foundational federal employment law in the US. It establishes the federal minimum wage ($7.25/hour, though many states and localities set higher rates), the requirement to pay overtime at 1.5× the regular rate for hours over 40 in a workweek, recordkeeping standards for employers, and child labour protections.

The FLSA covers most private sector employees and state/local government workers. Federal employees are covered by separate laws. The FLSA exempts certain categories of workers from overtime requirements — notably 'exempt' employees in executive, administrative, professional, and outside sales roles who earn more than $684/week ($35,568/year) and meet specific duties tests. Being paid a salary does not automatically make you exempt.

The Department of Labor's Wage and Hour Division (WHD) enforces the FLSA. Workers can file complaints with WHD or bring private civil actions. Back pay can be recovered for up to 2 years (3 years for willful violations), and liquidated (double) damages are available. There is no cap on recovery.

Under the Fair Labor Standards Act (FLSA), covered non-exempt employees must be paid at least 1.5 times their regular rate of pay for all hours worked over 40 in a single workweek. The workweek is a fixed recurring period of 7 consecutive days — employers choose when it starts but cannot change it to avoid overtime obligations.

The regular rate includes all remuneration — base pay, shift differentials, production bonuses, and non-discretionary bonuses — divided by total hours worked. Purely discretionary bonuses are excluded. Comp time (time off instead of overtime pay) is generally not permitted in the private sector.

State law can add daily thresholds to the federal weekly rule. California generally requires 1.5× after 8 hours in a workday and double time after 12, with separate seventh-consecutive-day rules. Alaska generally requires overtime after 8 hours in a day or 40 in a week. Nevada's daily rule generally applies after 8 hours in a rolling 24-hour period to employees earning less than 1.5 times the state minimum wage, subject to exceptions such as an agreed four-day, 10-hour schedule. Colorado generally requires overtime after 12 hours in a workday or 12 consecutive hours as well as after 40 in a week. Puerto Rico has its own daily regime, while other states add occupation-specific rules — for example in some manufacturing or healthcare settings. Always apply whichever valid federal, state or local rule gives the worker more protection.

Exempt status is separate from being paid a salary. The executive, administrative and professional exemptions generally require both qualifying duties and the applicable salary basis; job titles alone do not decide it. Other exemptions and special calculations cover outside sales, certain computer employees, hospitals, public agencies and some commissioned retail work. Employers must also count short rest breaks and work performed before or after a scheduled shift when that time is compensable.

If your state has a daily rule, calculate daily overtime first and then the weekly entitlement without counting the same hour twice. Keep the employer's stated workweek, daily time records, bonus records and pay stubs. A worker can raise unpaid federal overtime with the U.S. Department of Labor Wage and Hour Division or pursue an available state claim; limitation periods and remedies vary, so verify the current state rule before relying on an estimate.

Many employers incorrectly assume that paying someone a salary makes them exempt from overtime. Under the FLSA, exemptions require both a salary threshold and a duties test. To be exempt as executive, administrative, or professional (EAP), an employee must earn at least $684/week ($35,568/year) on a salary or fee basis AND their primary duty must meet specific criteria for each category.

Executive employees primarily manage a department or enterprise, direct 2+ employees, and have authority over hiring/firing. Administrative employees perform office work directly related to management or business operations and exercise discretion on significant matters. Professional employees hold advanced knowledge in a learned field acquired through a degree, or are employed in a creative/artistic role. Outside sales employees are also exempt.

If you perform non-exempt duties as a significant part of your role, the exemption may not apply even if you hold a job title that sounds senior. Misclassification is common — the DOL and state agencies actively investigate. Back pay for unpaid overtime can be recovered for up to 2 years (3 for willful violations), plus an equal amount as liquidated damages.

The federal minimum wage under the FLSA is $7.25 per hour, last raised in July 2009. However, federal law is a floor — states and local governments can (and many do) set higher rates. As of 2026, over 30 states have minimum wages above $7.25. California is at $16.50/hour (general rate); Washington State $16.66/hour; New York $16.50/hour in NYC; Washington DC $17.50/hour.

Tipped employees in covered industries may be paid a reduced cash wage of $2.13/hour under the federal tip credit, provided that tips bring their total hourly earnings to at least $7.25. If tips fall short, the employer must make up the difference. Several states — including California, Alaska, and Minnesota — require the full minimum wage for tipped workers regardless of tips received.

Youth minimum wage: employers may pay workers under 20 a minimum of $4.25/hour for the first 90 days of employment (the FLSA youth sub-minimum). Many states prohibit this sub-minimum. The DOL Wage and Hour Division enforces the federal minimum wage; SHRM tracks all state rates.