Vacation benefits

Watch out for accrual pitfalls

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It is not uncommon for employers to implement paid vacation policies in which the employee receives a lump sum of vacation time upon reaching a certain length of service or anniversary date, rather than accruing the vacation over time. For example, the employee receives zero paid vacation time in their vacation bank during their first year of employment, but at their one-year anniversary date, they are suddenly credited with one week of paid vacation. This practice is not compliant and can expose an employer to substantial liability.

What are the vacation accrual rules?

Although employers are not required to provide paid vacation benefits at all, if they do offer paid vacation, they must comply with very specific rules. Some of the more complex rules involve how paid vacation accrues. Under California law, paid vacation time is treated as wages that are earned over time. So if the employee is to receive a week of vacation after one year of employment, that week of vacation must accrue at a set rate as the employee works over time. It cannot just be credited to the employee at once in a lump amount. For example, if the employee is to have one week of vacation upon his or her one year anniversary, that week of vacation must accrue on a daily pro-rata basis.

Do employers have any control over vacation accrual?

Employers can control when vacation starts to accrue, so they can place waiting periods upon new hires, however, they cannot manipulate the accrual rates as a subterfuge around the accrual rules—for example, imposing a 6 month waiting period in the first year with an accelerated accrual rate during the seventh through twelfth months, and then decelerating the accrual rate at the beginning of the second year. Also, employers can control when employees use vacation time, so for example, it is permissible to have a policy that employees cannot use accrued vacation time during their first year of employment. In addition, employers may place a reasonable cap on the total amount of vacation time that an employee has accrued at any one time, so that once the cap is reached, the employee stops accruing any further vacation time until the employee uses vacation time to bring the total accrual below the cap.

Paid vacation policies are subject to many restrictions and requirements so employers should have them reviewed by legal counsel.

In Coffee Break episode 7, Chris and Jennifer discuss the fine print of vacation accrual and how to avoid a common mistake.