Background: On Jan 1, 2023 we instituted several changes to employee time off accrual policies. We constructed the new vacation accrual policies carefully and gave some of our more senior staff "legacy policies" in order to not decrease any current employee's vacation accrual rate. However, we DID institute a cap on the number of vacation hours an employee could bank at any given time (1/2 a year for FT staff, and 1/4 yr FTE for PT staff). We did this for two reasons: 1) to mitigate financial risk to our library in the event of unforeseen separations, when we pay out any unused vacation time, and 2) to encourage staff to take regular vacations, which prevents burnout and encourages us to understand each other's job responsibilities better when covering for someone else.
Unfortunately, the vacation cap has had some unintended consequences. Some staff members are reticent to take vacation and are bumping up against the cap each month, which effectively means their compensation is being reduced. Also, our PT staff work varying number of hours per week (20-32) but we don't prorate the PT vacation cap (for logistical reasons), which makes it difficult for staff who work close to FT hours to save up enough time to take a longer vacation, or multiple vacations in a relatively short period.
My legal question is: If we were to change our time off accrual policy to allow staff to bank as much vacation as they like but specify that upon separation they could only be paid out 'x' number of hours, could we be accused of wage theft?
Vacation time is weird.
Why is it weird?
Well, first, it's fictional: it's time you get "paid" for, even though you are not at work.
Second, unlike earned wages, vacation time can be magically obliterated, with employers deciding through policy that only a certain amount can be "carried over" or accrued.
And third, we don't use it enough.
So, with all the weirdness laid out on the table, let's answer the question:
Yes, an employer can use a clear and well-communicated policy to limit payout of accrued vacation time at termination.
This is very nice of New York, but the protection does come with limits, the biggest one being that an employer can limit the obligation to pay out the accrued time through policy. So long as the policy is clear, there is no obligation to pay out accrued vacation.
Or, as they New York State Department of Labor puts it:
Whether an employer must pay for unused time depends upon the terms of the vacation and/or resignation policy. New York courts have held that an agreement to give benefits or wage supplements, like vacation, can specify that employees lose accrued benefits under certain conditions. [See Glenville Gage Company, Inc. v. Industrial Board of Appeals of the State of New York, Department of Labor, 70 AD2d 283 (3d Dept 1979) affd, 52 NY2d 777 (1980).] To be valid, the employer must have told employees, in writing, of the conditions that nullify the benefit.
An employee has earned vacation time
There is no written forfeit policy
The employer must pay the employee for the accrued vacation
A typical example of this limit is cited in the member's question: limiting "carry-over" from year-to-year, which effectively means wiping out time earned before it is used, generally to limit employee absence from too much accrual.
Case law and New York State Department of Labor Guidance specifically allow this limit, with the burden placed on the employer to have policy that is clear and well-communicated.
As recently stated in a 2018 case about unpaid vacation:
The determination as to whether a former employee is entitled to be paid for vacation time is generally governed by the contract between the parties (see e.g. Gennes v Yellow Book of NY, Inc., 23 AD3d 520, 522, 806 N.Y.S.2d 646 ; Matter of Glenville Gage Co. v Industrial Bd. of Appeals of State of NY, Dept. of Labor, 70 AD2d 283, 421 N.Y.S.2d 408 ; Colton v Sperry Assoc. Fed. Credit Union, 50 Misc 3d 129[A], 28 N.Y.S.3d 647, 2015 NY Slip Op 51894[U] [App Term, 2d Dept, 9th & 10th Jud Dists 2015]; Steinmetz v Attentive Care, Inc., 39 Misc 3d 148[A], 972 N.Y.S.2d 147, 2013 NY Slip Op 50905[U] [App Term, 2d Dept, 9th & 10th Jud Dists 2013]). "The employee bears the burden of proving an entitlement to payment for vacation time" (Linwood v United Activities Unlimited, Inc., 43 Misc 3d 131[A], 988 N.Y.S.2d 523, 2014 NY Slip Op 50612[U], *2 [App Term, 2d, Dept, 2d, 11th & 13th Jud Dists 2014]; see Grisetti v Super Value, 189 Misc 2d 800, 801, 736 N.Y.S.2d 835 [App Term, 2d Dept, 9th & 10th Jud Dists 2001]).
So, the key to what this library wants to achieve is a clear policy with a well-established "forfeit" provision; in this case, saying all but 2 weeks' worth of accrued vacation are forfeited upon termination.
When considering implementing such a payout limit, an employer is wise to (A) pay close attention to the practical effect it will have and give time for employees to use their surplus accrued time or (B) offer an on-time payout for over a certain amount of accrual, so people do not feel accrued time has been taken away from them. This requires attention to how much time an employee is allowed to take during the year and other factors that will be uniquely set by the employer’s policy.
And with that, I wish you good vacations.
 Just to be clear: I am all for people getting paid a good wage AND having time off. I just find it odd that time off is paid, rather than people just getting paid slightly more and working slightly less.
I think this is one reason Americans don't use all their vacation time.
 As that term is used in Labor Law Section 191, the law requiring "regular payment" of wages.
 As that term is defined by Labor Law 198-c.
 NYSDOL guidance on this is at https://dol.ny.gov/wages-and-hours-frequently-asked-questions.
 Id.—See footnote 4.
 Kane v. Ginnel, Supreme Court of New York, Appellate Term, Second Department (June 21, 2018).