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“Unlimited” Vacation Policy Under Scrutiny by California Court of Appeal
Apr 15, 2020

“Unlimited” Vacation Policy Under Scrutiny by California Court of Appeal

Topics: Court Decisions, Personnel Policies and Procedures

Vacation Pay Under California Law

California law does not require employers to provide employees with paid time off/vacation pay.  However, when employers choose to do so, certain rules apply.  Labor Code Section 227.3 requires employers to pay out all accrued, unused vacation pay as vested wages at the time of termination.  Employers must also keep track of the accrual and use of vacation days.  This can be challenging, especially in a digital age in which many exempt employees read and respond to emails, take phone calls, or otherwise conduct at least some work-related business nearly every day, even while technically “on vacation.”  These realities can further complicate tracking and use of vacation days, making it unclear whether employees ever take a full day in which they are completely “off.” 

The Growing Popularity of “Unlimited” Vacation Policies

In recent years, many employers have adopted “unlimited” vacation policies, offering flexibility by granting exempt employees increased freedom about when and how to work.  While the terms of unlimited vacation policies are varied, the general goal is to allow exempt employees to take differing amounts of time off so that each employee has discretion to organize his or her time while still performing job duties effectively.  For example, some employees may prefer to work longer hours and on weekends to permit more frequent and longer vacations throughout the year.  Other employees may take fewer and shorter vacations to avoid working evenings and weekends.  Thus, employees are trusted to fulfill their overall job responsibilities – the requirements of which vary by industry and role – but are largely free to come and go as they please.  Such arrangements are mutually beneficial to employees and employers alike.  Employers are relieved of burdensome tracking and recordkeeping requirements and employees can enjoy increased autonomy in balancing and scheduling work and leisure.

The Court of Appeal Rejects “Unlimited” Label for Vacation Policy

In the first published opinion to address an unlimited vacation policy, the Court of Appeal’s April 1st decision is no joke - and is nearly 60 pages long!  Instead, the ruling is cause for employers to carefully review their unlimited policies against this new guidance. 

In McPherson v. EF Intercultural Foundation, Inc. (“EF”), the three plaintiffs were full-time, exempt, salaried area managers who ran educational and cultural exchange programs for international students across the United States.  The plaintiffs’ job duties for the non-profit included hiring, training, and working with staff to recruit host families for the students and to operate the programs.   

While EF’s employee handbook contained a vacation policy for most employees providing a fixed amount of vacation days accrued each month based on length of service, this policy did not apply to the plaintiff managers.  Instead, the plaintiffs were subject to an informal, unwritten policy in which they could take time off with pay, but they did not accrue vacation days.  The plaintiffs also did not have to use EF’s online system to request time off or to track the number of days they had taken.  Instead, they were required to notify their supervisors before taking time off.  The plaintiffs testified that they were never told that they had “unlimited” vacation – only how to request and take time off (they apparently never asked how much they could take, but were able to take as much as they needed each year).  While taking time off during EF’s peak season was “strongly discouraged,” it was approved in some circumstances. 

Unsurprisingly, the plaintiffs’ ability to take vacation was not literally “unlimited” in the broadest sense of the word.  The clear intent of EF’s policy is identical to most employers that offer “unlimited” vacation policies.  That is, it would be absurd to suggest that an employee might take six months of vacation per year.  But the Court was unimpressed and did EF no favors.

EF’s “Unlimited” Policy Was Not Actually Unlimited and Instead Had an “Implied Cap”

The Court decided that EF’s policy was not truly unlimited, but instead that it merely provided an “undefined” amount of vacation.  In this particular case, while the plaintiffs were generally aware of how to request and take time off, the Court found against EF mainly because:  (a) EF failed to inform the plaintiffs that they had unlimited vacation; (b) EF did not have a formal, written “unlimited” vacation policy; and (c) EF’s policy was not unlimited “in practice.”  These facts led to the finding that EF had failed to define the limitations on time off.  The only good news is that the Court limited its holding to the facts presented by EF’s policy, making it theoretically possible that other employers’ unlimited vacation policies might fare better if challenged.

Specifically, the Court found that EF’s policy had an “implied limit” because, in practice, EF actually expected the plaintiffs to take vacation in the range typically available to corporate employees at EF, i.e., between two and four weeks, as opposed to an actual “unlimited” amount.  The Court acknowledged, in a footnote, that by “unlimited” it was not suggesting that EF intended to permit plaintiffs to take vacation “365 days a year” but nonetheless held that “one would expect unlimited time off policies at least to afford employees the ability to take longer or more frequent periods of time off than a traditional accrual policy or allow employees to work fewer hours in lieu of having more vacation days.”  The Court’s statement is unrealistic, as many employees may choose to take a similar amount of vacation even under an unlimited policy for a variety of reasons.  However, employers should not be penalized based on how employees choose to use their vacation time, or risk having their policies invalidated simply because employees end up taking similar amounts of vacation time to those subject to limited, accrual-based vacation policies.  The Court noted that the plaintiffs typically took about two weeks of vacation each year, and never sought or received more than four weeks, and even cited one of the plaintiff’s testimony that “the restrictions of the job probably wouldn’t have allowed her to take unlimited time off because she would not have been able to complete all her duties.”  The Court’s observations are troubling because they suggest that the validity of a vacation policy hinges in part on how employees choose to use it, rather than focusing on the fairness and lawfulness of the terms of the policy itself.   

The Court concluded that “the record simply does not show plaintiffs reaped the benefits that [employers] contend unlimited time off policies provide to employees” and that no evidence showed that the plaintiffs’ schedule permitted – or that EF would have approved – more than a few weeks off at a time.  Accordingly, the Court found that EF’s policy had “an implied ‘cap’ and was by no means ‘unlimited.’”  As a consequence, EF was required to pay out vacation wages to the plaintiffs, all of whom had left EF’s employment.  The amounts owed were determined essentially as if plaintiffs had been subject to the accrual policy set forth in EF’s handbook.   In other words, the Court completely disregarded EF’s unlimited policy and instead awarded the plaintiffs vacation pay damages pursuant to a policy that undisputedly did not apply to them because the behaviors of the parties resulted in a similar amount of paid vacation being used.

Guidance For Unlimited Vacation Policies In General

Despite rejecting EF’s policy, the Court offered guidance for crafting “truly” unlimited time off policies, suggesting they might be lawful if they are in writing and that such a written policy:

  1. clearly provides that employees’ ability to take paid time off is not a form of additional wages for services performed, but perhaps part of the employer’s promise to provide a flexible work schedule – including employees’ ability to decide when and how much time to take off;
  2. spells out the rights and obligations of both employee and employer and the consequences of failing to schedule time off;
  3. in practice allows sufficient opportunity for employees to take time off, or work fewer hours in lieu of taking time off; and
  4. is administered fairly so that it neither becomes a de facto ‘use it or lose it policy’ nor results in inequities, such as where one employees works many hours, taking minimal time off, and another workers fewer hours, and takes more time off.

The Court concluded by stating that “unlimited paid time off under such a policy – depending on the facts of the case – very well may not constitute deferred compensation for past services requiring payment on termination under section 227.3.”

Key Takeaways For Employers

This is a terrible decision for employers.  The Court’s guidance allows employees/plaintiffs to challenge virtually any unlimited vacation policy on the grounds that, in practice, it was not clearly communicated or that it somehow resulted in unfairness when applied.  The factors are subjective and problematic on multiple levels, including the apparent emphasis on the number of hours worked.   For example, the “more versus fewer” hours emphasis runs directly contrary to the notion that exempt employees are not evaluated or paid for their hours worked, but instead for their overall services to the employer.  The suggestion that evaluating the hours worked for exempt employees negates the concept and benefit of exempt status.  In addition, the Court ignores the realistic limitations that job responsibilities place on the concept of “unlimited” vacation.  “Unlimited” vacation means flexibility around time off, not necessarily more time off.  But the Court falls prey to the trap of interpreting the term far too literally and to the point of absurdity.

In scrutinizing unlimited vacation, and the motivations behind their adoption, the Court ignores the potential for employee abuse of standard vacation accrual, which is why many employers implemented unlimited policies in the first place.  For example, exempt employees subject to accrual-based vacation policies often collect the maximum amount of accrued vacation wages at termination, despite having enjoyed the fruits of multiple vacations over the course of many years.  This is achieved by the technical act of “working” some minimal amount each day, even if the employee spent the majority of certain weeks, for example, enjoying a relaxing beach vacation.  Even though there may not always be malicious intent, i.e., employees are dutifully managing their responsibilities by briefly checking in on work, the employer can still unfairly pay the price in the form of weeks of additional salary at termination for every such employee, due to the illusion of having taken no time “off.”

Sometimes, freeing both employees and employers of the hassle of tracking vacation accrual and use is a win for everyone, but the Court’s decision dealt a significant blow to such freedom.  Employers should carefully review any unlimited paid time off policies currently in place to be sure they are in writing and include the factors listed above, including expressly disclaiming any entitlement to wages earned for time off/vacation.  Employers should also consider simply characterizing such policies as offering a flexible work schedule as opposed to vacation or paid time off.  Unfortunately, the Court’s decision does not provide sufficient clarity to guarantee that a particular policy will ultimately be found to be lawful, but at least some guidance is available to avoid the most obvious challenges that befell the employer in this case.

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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

Robin Largent has a regular presence in California state and federal courts and has been lead defense counsel and appellate counsel for large and small California employers in litigation (and arbitration) ranging from individual discrimination and harassment claims to complex wage and hour representative and class actions. She also leads the firm’s appellate practice, having substantial experience and success handling appeals, writ petitions, and amicus briefs in both state and federal court on issues such as class certification (particularly in the wage and hour arena), manageability and due process concerns associated with class action trials, exempt/non-exempt misclassification issues, meal and rest break compliance, trade secret/unfair competition matters, and the scope of federal court jurisdiction under the Class Action Fairness Act.
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