Employers Lawfully May Prohibit Employees From Earning Vacation During Their First Year of Employment
California has a unique law regarding vacation benefits. Unlike the laws of many other states, California law requires an employee to be paid for all earned but unused vacation benefits at the time of termination of employment. California law thus prohibits “use it or lose it” policies and policies that otherwise provide for forfeiture of earned vacation benefits. That said, California law does not require employers to provide paid vacation benefits to employees, and employers generally are permitted to decide whether to provide paid vacation, how much to provide, and which employee classifications will be eligible for the benefit. Employers may impose reasonable “caps” on the maximum carryover and accrual of vacation benefits and may control the scheduling of vacations. Employers may also choose to pay out accrued, unused vacation benefits at the end of each year in lieu of allowing carryover of unused benefits. As long as an employer provides clear written notice of its vacation policy terms and conditions to employees, those terms generally will be enforced – as long as they do not provide for a forfeiture of earned vacation. This sounds simple enough, but sloppy drafting of a policy can lead to a claim that a policy operates to cause an illegal forfeiture of vacation benefits. A recent case, Minnick v. Automotive Creations, Inc., illustrates this.
In Minnick, the employer had a vacation policy providing that employees do not earn vacation during their first year of employment. However, once they completed their first year, they would be eligible to take one week of vacation, and after completing two years, they would be eligible to accrue up to two weeks of vacation. The plaintiff worked for the employer for just six months. Pursuant to its policy, the employer did not pay the plaintiff for any accrued vacation time on his final paycheck because the plaintiff had not earned any vacation. The plaintiff sued on behalf of himself and all similarly situated employees, alleging that the employer’s policy violated California law by causing employees who worked for them for less than one year to forfeit “earned” vacation benefits. The plaintiff’s theory was that even though the policy stated on its face that employees did not earn or accrue vacation during their first year of employment, they implicitly did, in fact, earn such vacation because the policy allowed them to take one week’s vacation upon completing their first year. Thus, the vacation time “must have” been earned during the first year of employment and, as such, it should not have been subject to forfeiture. The plaintiff argued that he should have been paid six months’ worth of accrued vacation benefits on termination of employment.
The trial court disagreed with the plaintiff, throwing out his claims on a motion to dismiss. The Court of Appeal agreed with the trial court, finding that the employer’s policy was lawful and did not operate to cause an illegal forfeiture of vacation benefits. In so holding, the court explained that an employer is free to impose conditions on the right to earn vacation benefits, including a condition that an employee be employed for at least one year before earning any vacation benefits. The court focused heavily on the express wording of the employer’s policy and the fact that it explicitly stated that employees do not earn or accrue vacation during their first year of employment. Based on this language, the court held that the plaintiff did not have a valid legal claim that he had earned or accrued any vacation benefits during his first six months of employment. Also based on the clear language of the policy, the court rejected the plaintiff’s argument that the policy nevertheless “implied” that employees earn vacation during their first year of employment and that there was really just a waiting period (one year) before they could “take” the vacation they had already earned. The court reasoned that an employer is free to "front load" vacation benefits (making the entire amount available for use at the beginning of a benefit year rather than having benefits accrue over time) and that it appeared that the employer's policy did just that (even though the policy later talked about employees with two years of service "accruing" a "maximum" of two weeks of vacation).
Although this case resulted in a positive outcome for the employer, it still serves as a good reminder that vacation pay claims are alive and well in California, and that California has unique laws prohibiting forfeitures of earned vacation. Careful and clear drafting of vacation policies is of critical importance to ensure that any waiting periods for vacation eligibiilty (as well as certain accrual caps) are lawful and will not be deemed a subterfuge for an illegal forfeiture policy.