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 15.1.4.1 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.