From the Hotline: Vacation Pay and Raises
Question: If an employee earns vacation while hired at one rate of pay, and then receives a raise, can the employer compensate the vacation pay to the employee at the rate it was earned?
Answer: While there is no law that requires private sector employers to provide vacation time pay, it is a common practice and some states do have specific rules regarding the payment of earned vacation pay. Please check the applicable rules for your location, but note that the accepted practice is to pay vacation at the current rate of pay. Paying less puts the employer at risk for wage and hour claims based on the employees’ understanding of the vacation agreement.
Develop your time off policies in compliance with federal, state, and local regulations with clear definitions of how the time is earned, used, paid out, or forfeited. Most state departments of labor will have guidance on vacation regulations.