We recently switched from a system of offering separate sick time and vacation time to one paid time off (PTO) entitlement. Employees get 12 paid days off per year, to use as they see fit. Employees accrue PTO every pay period; once they reach three weeks, they don't accrue any more unless they use some. We do business in California, and I know we have to pay out unused, accrued vacation time when an employee leaves. But does this include all PTO, even though some of it is supposed to cover sick leave?
Many employers have made the same decision you have. Some like the ease that a PTO program offers, some want to give employees more control over their time off, and some undoubtedly just grew tired of listening to employees trying to sound ill ("cough cough, sniffle") when calling in sick after a three-day weekend. No matter what your company's reasons, switching to one system for all time off makes a lot of sense.
Despite these advantages, however, PTO systems can present a couple of difficulties. And you've put your finger on one of them: cashing out unused vacation time. A number of states require employers to pay out unused vacation time to employees who leave the company, whether voluntarily or involuntarily. In some states, accrued vacation is considered a form of compensation that the employee has already earned. To withhold it when the employee leaves would be wage theft. (California is one of these states.) In other states, an employer's responsibility to pay out accrued vacation depends on its own policies and practices. If the employer has promised to pay out accrued vacation, or has simply done so in the past, the employee has a right to the same treatment.
Because PTO is intended to replace both sick and vacation days, some employers assume they don't have to pay out the full allotment when an employee leaves. However, this is generally incorrect. In California, for example, the Department of Labor Standards Enforcement (DLSE) has said that all PTO must be counted as unused, accrued vacation -- and must be cashed out when the employment relationship terminates. The employee has the right to and could use all PTO for vacation. Therefore, employers that would have to pay out vacation when an employee leaves generally have to pay out PTO in full, too.