Contributors

Jennifer Woo Burns

Of Counsel

In the course of providing advice and counsel to our clients, we encounter compliance issues that we feel can serve as valuable cautionary tales for all of our readers. Some perennial compliance snags include vacation accrual policies, and how employers pay out unused vacation time when an employee terminates.

Although employers are not obligated to offer paid vacation as a benefit, if the benefit is offered, accrued vacation time is considered wages, with specific rules governing accrual and payout. Some of the rules that vacation policies commonly run afoul of include:

Vacation accrues over time

As earned wages, vacation time is deemed to be earned over time as the employee works. Therefore, policies that provide for vacation time to be received in a lump sum are not permitted. For example, a policy wherein the employee receives one week of accrued vacation all at once at the employee’s first anniversary is not allowed. The Department of Labor Standards Enforcement views this “cliff vesting” as an employer’s attempt to avoid having to pay out a pro-rata portion of the accrued vacation if the employee terminates prior to their one-year anniversary. The proper accrual method would be that the one week of vacation is accrued over the course of the year (e.g., at a rate of 1.66 hours each semi-monthly pay period). However, if the employer wants to avoid having a new employee accruing vacation during first months of employment, it is proper to set a waiting period before any vacation time starts to accrue (e.g., the vacation policy provides that no vacation is accrued during the first 6 months of employment, and then it starts to accrue each pay period thereafter).

Accrued vacation time cannot be forfeited

Once vacation time is accrued, it cannot be lost, and unused vacation time carries over from year to year. However, employers can place a reasonable cap on how much total vacation time can be accrued, so that once a certain amount of vacation time is accrued, the accrual of additional time stops until the employee uses some vacation time to bring the accrual balance below the cap. Moreover, a vacation accrual balance can be reduced to the extent that it is cashed-out to the employee.

Payout of accrued unused vacation at termination must be at the employee’s current rate of pay

Although the employer’s policy may set its own method of calculating the pay-out of vacation time as it is used during employment, pay out of accrued vacation at termination has a different, more specific standard. Specifically, under Labor Code section 227.3, when accrued vacation is paid out to a terminating employee, the rate of pay for the vacation must be at the employee’s current rate of pay, which would generally be the employee’s current hourly average, or “regular” rate. As such, caps or other arbitrary pre-set vacation payout rates (i.e., $100 per day) that do not match the employee’s actual current pay rate would violate the Labor Code. Moreover, since vacation pay is considered wages, this final pay must be provided to the employee in a timely manner along with any other final wages that are due.

In order to avoid these potential pitfalls, and other legal requirements for vacation and PTO policies, it is important to have your vacation policy evaluated regularly by knowledgeable employment counsel, and updated as needed.