Can Employers Provide Vacation at Rate Lower Than Regular Pay Rate?

This week, a California court said yes.  The case, Bell v. H.F. Cox, Inc., was brought by trucking employees against their employer, alleging various wage and hour claims, including unpaid vacation, unpaid overtime, and missed meal and rest breaks.  With respect to the vacation, the employer had an unusual policy that provided vacation but expressly stated that vacation would only be provided at the rate of $500 (later increased to $650) per week, regardless of what the employee’s actual rate of pay was. The policy further stated that unused vacation was not paid out on termination of employment (which generally is not legal in California).  The employer moved for summary adjudication of the vacation claims, arguing that the employer’s vacation pay plan was governed by ERISA and that ERISA preempted California law in this area.  The trial court agreed and threw out the employees’ vacation claims.

The appellate court reversed in part.  The appellate court held that the trial court erred in finding the vacation claims preempted by ERISA as a matter of law.  The appellate court held that there were triable issues of fact as to whether ERISA preemption applied to the employer’s vacation plan in this case, and thus remanded the issue to the trial court for hearing on that issue. (ERISA preemption generally only applies where the employer’s plan provides for payment of vacation from a separate fund as opposed to the employer’s general assets.)  However, the appellate court determined that ERISA preemption only impacted the issue of whether the employees had a valid claim against the employer for failure to pay out unused vacation on termination of employment.  As for the claim that the employer illegally provided current employees vacation at a lower wage rate than the employees’ current wage rate, the court held that there was nothing unlawful about this policy under California law and thus it did not need to reach the issue of ERISA preemption as to this claim.  The court analyzed the statute at issue, Labor Code section 227.3, which states that accrued, unused vacation generally must be paid out at the employee’s final wage rate on termination of employment.  The court held that this statute only applies to payout of vacation on termination of employment, and that it does NOT contain any requirement that vacation benefits be provided at an employee’s regular rate of pay during employment.  As such, the court held that the trial court properly granted summary adjudication of the employees’ claim for vacation based on the rate at which it was paid during employment.

In addition to addressing vacation issues, the H.F. Cox case also addresses the trucking employees’ claim to overtime compensation under the FLSA.  The trial court found in favor of the employer on this claim, holding that the employees were exempt from overtime under the federal motor carrier exemption, which generally applies to drivers engaged in interstate commerce.  The court of appeal agreed with the trial court that the motor carrier exemption applied, even though most of the driving performed by the employees at issue was intrastrate driving.  The court broadly interpreted the exemption to apply even to intrastate deliveries, if the goods being delivered originated out of state and the intrastate final delivery is a continuation of the out of state journey.

The H.F. Cox decision is a good one for employers relying on the motor carrier exemption as a defense to overtime claims of drivers.  As for the vacation-related portions of the decision, employers may not want to run out and revise their policies to try to invoke ERISA preemption to avoid payout of vacation on termination of employment, or to provide current employees vacation benefits at a pay rate less than the employees’ regular rate of pay.  Employers are cautioned to seek legal advice in these areas.

Editor
Cal Labor Law

Robin E. Largent is a Partner in CDF’s Sacramento office and may be reached at 916.361.0991 or rlargent@cdflaborlaw.com BIO »

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