Vacation Pay and Unemployment Benefits: What You Need to Know

When you lose work, it's natural to worry about every dollar of income. Money from any remaining vacation days or paid time off can be a real help when facing an uncertain future – especially because it doesn't affect your unemployment insurance payments. States consider vacation pay money you as already earned, and it does not count as income that offsets your unemployment insurance benefits.

Permanent Separation From Job

Payments of residual vacation and paid time off balances don't affect unemployment benefits so long as the separation is permanent. However, if the claimant is promised a date when she can return to work and is using vacation pay to help during an interim period, she probably will not qualify for unemployment benefits.

Layoff Start Date

When an employee is on temporary layoff with a finite return date and given vacation pay, unemployment programs consider the vacation pay to be the person's means of support until it runs out. The person can still make an unemployment claim, but she has to report her vacation income each week, which usually cancels out any unemployment benefits for the week. If vacation pay stops and the return date has not yet arrived, the claimant can begin receiving benefits at that time.

Impact of Severance Pay

Unlike vacation pay, severance offerings count against unemployment benefits. An employee who receives a severance package usually cannot receive unemployment benefits so long as severance payments continue. However, in some states including Massachusetts, if an employer gives severance in exchange for an employee signing a release of all future claims, the employee can usually still receive unemployment benefits.

Taking a Vacation

Pocketing vacation pay for living costs is fine under unemployment insurance rules, but actually taking a vacation is not. Claimants must be actively searching for work. Taking a break and traveling makes a person ineligible to claim benefits for the time she's away from home. According to most states' rules, a claimant must not claim for weeks she is out of town.

It's worth noting, however, that at least 27 states including California have relaxed the requirement for continued job search while collecting unemployment due to the global coronavirus pandemic. At time of publication, those collecting unemployment benefits in one of these 27 states are not required to look for work in order to remain compliant.