Employer Required to Pay Out Unused Vacation Under an Unwritten, Unspecified and Purportedly Unlimited Paid Time Off Policy

Haight Brown & Bonesteel LLP

On April 1, 2020, the California Court of Appeal, Second District (Los Angeles) in McPherson v. EF Intercultural Foundation, Inc. (B290869), addressed the issue of whether an employee’s right to paid time off (under an employer policy that allows an employee to take an unspecified amount of paid time off without accruing vacation time) vests so the employer must pay the employee for unused vacation when her employment ends. The Court of Appeal held that whether an employer must pay for unused vacation is determined on a case-by-case basis. Under the employer’s policy in this case, the employer was required to pay for unused vacation after the employment ended.

In McPherson, the plaintiffs, exempt area managers, sued their employer for violating Labor Code sections 227.3 (denial of vacation wages) and 201 (unpaid wages at discharge and waiting time penalties), among other violations, alleging it failed to pay them accrued but unused vacation wages. The employee handbook contained a vacation policy that provided salaried employees with a fixed amount of vacation days per month based on their length of service and employees could carry over 10 accrued, unused days from one year to the next. If the employee carried over more than 10 days, the employer would pay the employee 70 to 100 percent of the value of those days. This policy did not apply to area managers. Instead, the plaintiffs could take time off with pay, but they did not accrue vacation days and were required to notify their supervisors before taking time off.

After a bench trial, the court found the employer liable for vacation wages. According to the trial court, the employer’s policy was that the plaintiffs had the right to take an amount of approved vacation that was within the amounts typical of most jobs at the company. The employer’s undefined vacation policy could not avoid vesting, but simply presented a problem of proof as to what the employer’s policy was. Based on the employees’ testimony, the court determined that 20 days of annual vacation was available to the plaintiffs. The court concluded the employer owed each employee for unpaid vacation, but the employer did not owe the plaintiffs waiting time penalties. The employer appealed.

The Court of Appeal held that section 227.3 applied to the employer’s purported “unlimited” paid time off policy where substantial evidence demonstrated that the plaintiffs had an implied limit of vacation time. The employer never told their employees that they had unlimited paid vacation. The employer did not have a written policy or agreement, nor did the employee handbook cover these employees. Moreover, the plaintiffs sought or received no more than 20 work days of paid vacation throughout their employment. The employer provided the plaintiffs with paid vacation, and therefore “by default that paid time off constituted additional wages attributable to the services the plaintiffs rendered during the year, vesting as they labored.” As such, “once paid vacation is offered, any limit on an employee’s entitlement to it must be expressed in a clear, written policy from the get-go.”

However, not “all unlimited paid time off policies give rise to an obligation to pay ‘unused’ vacation when an employee leaves.” “Employees and employers are free to contract for unlimited paid vacation, consistent with the Labor Code and governing case law.” For example, an unlimited paid time off policy may not trigger section 227.3 where, “in writing it (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 defacto ‘use it or lose it policy’ nor results in inequities, such as where one employee works many hours, taking minimal time off, and another works fewer hours and takes more time off.” Ultimately, whether section 227.3 applies to an employer’s paid time off policy requiring compensation for unpaid vacation upon termination depends on the particular facts of each case.

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Haight Brown & Bonesteel LLP

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