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Navigating Employee Vacation Pay and Accrual in California: A Guide for Employers
Oct 26, 2023

Navigating Employee Vacation Pay and Accrual in California: A Guide for Employers

Topics: Court Decisions, Wage & Hour Issues

As reported in last month’s CDF Wage & Hour Task Force blog post, a recent Ninth Circuit panel in Harstein v. Hyatt Corporation, held that employees who were “laid off” at the beginning of the COVID-19 pandemic, March 2020, were entitled to payment for accrued vacation time at the time of the lay-off, even though the employees were not officially terminated until June 2020.

While this case returns to the District Court to determine whether the failure was “willful,” this month’s blog post looks at the legal requirements of vacation pay and the ability to cap accrual of vacation time under California law, including valuable tips for California employers to help compliance.

California law does not require employers to provide vacation to its employees, but if the employer does, it must comply with certain requirements. California law considers vacation pay to be a form of wages, and employees have the right to accrue and use vacation time that has vested. Employees can use accrued vacation time as soon as it's earned (or vested), and employers must not impose unreasonable restrictions on its usage. Given that vacation time is considered a form of wages, employers are required to pay employees for any unused accrued vacation time upon termination or separation of employment. Failure to timely do so may result in additional penalties recoverable under Labor Code section 203, which in many cases may significantly exceed the amount of vacation pay.

California law prohibits "use it or lose it" vacation policies where employees forfeit accrued vacation time that is not used by a certain date. This does not mean, however, that vacation time, if unused, must accrue indefinitely. Employers may cap vacation time that can accrue, so that no additional vacation time accrues until the employee's total existing vacation time falls below the defined cap. This cap must be reasonable and cannot deprive employees of their earned vacation pay.

The DLSE provided guidance as to what it considers to be a “reasonable” cap. The DLSE Enforcement Manual §§ 15.1.4 and provide that a vacation cap policy that requires all vacation to be taken in the year it is earned (or in a very limited period following the accrual period) is “unfair and will not be enforced.” However, as set forth in a DLSE Opinion Letter from August 8, 1993, the DLSE has suggested that at least nine months must be given after vacation time has been accrued to allow employees to use that vacation time.

Employers can use different accrual methods, such as "accrual as you go" or "lump sum" accrual as part of its vacation policy. Typically, employees earn vacation time based on their length of service. Unlike Paid Sick Leave, paid time off (PTO), personal days, and floating holidays are treated like vacation time and are subject to many of the same rules.

Tips for Maintaining Compliance:

1. Compliant Policies are a Must:

a. Draft a comprehensive vacation policy that complies with California law, explicitly addressing the cap on accrual if applicable.

b. Regularly review and update the policy to ensure it aligns with any changing legal requirements as well as comports with changing business needs.

2. Put it into Practice:

a. Educate employees about their rights and obligations regarding vacation accrual and usage, as well as supervisors and management who may be applying the policy in practice.

b. Develop a clear procedure for timely payment of accrued vacation upon termination or separation of employment and ensure that this is properly reflected on the wage statement.

3. Consistency is Key:

a. Apply vacation policies consistently to all employees, ensuring fairness and avoiding inconsistent application.

b. Keep accurate records of accrued and used vacation time to prevent disputes.

c. Employers should ensure that vacation policies are clearly communicated to employees and readily accessible.

4. Staying Current and Informed:

a. Stay up-to-date with changes in California employment laws to maintain compliance.

b. Consult with legal counsel or HR professionals experienced in California employment laws to ensure your policies are in line with state regulations.

If you have any questions about this blog post or would like to schedule a wage and hour compliance check, please contact the authors of this article, Nancy “Niki” Lubrano or Brian Cole, or your favorite CDF attorney. Be sure to subscribe to CDF’s blog here to ensure you receive these regular monthly wage and hour law tips.

About CDF

For over 25 years, CDF has distinguished itself as one of the top employment, labor and immigration firms in California, representing employers in single-plaintiff and class action lawsuits and advising employers on related legal compliance and risk avoidance. We cover the state, with five locations from Sacramento to San Diego.

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About the Editor in Chief

Sacramento Office Managing Partner and Chair of CDF’s Traditional Labor Law Practice Group. Mark has been practicing labor and employment law in California for thirty years. His practice has a special emphasis on the representation of California employers in union-management relations and handling federal and state court litigation and administrative matters triggered by all types of employment-related disputes. He is also adept at providing creative and practical legal advice to help minimize the risks inherent in employing workers in California. He recently named “Sacramento Lawyer of the Year” in Employment Law-Management for 2021 by Best Lawyers®.
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