California  Law Permits Employers to Have a Waiting Period for Vacation/PTO Accrual

October 2009
Employment Law

On June 29, 2009, a California Court of Appeal held that an employer may have a policy which establishes a “waiting period” before vacation benefits will accrue and vest. Owen v. Macy's, Inc. (2009) 175 Cal.App.4th 462. In Owen , the employee worked at a department store from 1990 to 2006. The store's written policy specified that new employees earned and vested paid vacation after they completed six months of continuous employment, that the vacation year was May 1 through April 30, and that vacation was earned in the same vacation year that it accrued and vested. The store's policy also stated that on May 1, employees would accrue and vest in up to 50% of their annual vacation amount, with the remaining 50% accruing and vesting on August 1. This provision meant that an employee's vacation vested before it was actually earned, i.e., that the employee earned six months of vacation as of May 1 and the remaining six months of vacation as of August 1. However, employees who left on or before April 30 of any given year would not receive any vacation for the vacation year beginning May 1. Because the employee in Owen stopped working for the store on April 14, 2006, she did not receive a vacation payout for the vacation year beginning May 1, 2006.

Thereafter, the employee filed suit against the store alleging it failed to pay her accrued, vested compensation in violation of Labor Code section 227.3. Specifically, she claimed she was entitled to vacation pay for the vacation period running from May 1, 2006 to April 30, 2007 ( after her job ended). She argued that the store violated the Labor Code by imposing a six-month waiting period on new employees before vacation benefits begin to accrue/vest, and requiring her to forfeit vacation pay for 2006-2007, which she claimed she earned during the preceding year.

Labor Code section 227.3 provides:
Unless otherwise provided by a collective-bargaining agreement, whenever a contract of employment or employer policy provides for paid vacations, and an employee is terminated without having taken off his vested vacation time, all vested vacation shall be paid to him as wages at his final rate in accordance with such contract of employment or employer policy respecting eligibility or time served; provided, however, that an employment contract or employer policy shall not provide for forfeiture of vested vacation time upon termination.

On its face, Labor Code section 227.3 does not require an employer to provide its employees with any paid vacation. Rather, Section 227.3 states that if an employer chooses to provide vacation benefits, it cannot reclaim those benefits after they have been earned. As a result, the Court rejected the employee's contention that an employer must offer vacation benefits from the first day of employment because California law does not “dictate the point at which a company providing vacation benefits must begin to provide them.” The employer “is free to determine when an employee becomes eligible for vacation benefits so long as eligibility and vesting occur simultaneously.”

The Court analogized the store's waiting period to a “no additional accrual” policy, which is permissible. Under a “no additional accrual” policy, once an employee accrues the maximum amount of vacation, the employee cannot earn more vacation (and thus no more vacation vests) until the employee is below the maximum accrual amount. The Court reasoned that if an employer's written vacation policy legitimately prevents an employee from earning additional vacation compensation when the employee has “maxed out” on unused vacation time, then the same is true for an employer's vacation policy that prevents a new employee from earning any vacation time at all. Consequently, the Court upheld the store's use of an express written policy that forewarned new employees that their compensation package did not include paid vacation for the first six months.

Practical Advice for Employers:

  • Employers should ensure they have clear, written policies regarding vacation/paid time off accrual and payout. If an employer wants to institute a waiting period before vacation benefits accrue and vest, it should clearly state in its policy that an employee will not be entitled to accrue or use vacation during that period.
  • California law prohibits a “use it or lose it” vacation policy, in which employees lose earned vacation time that is not used by a specific date. Once an employee has earned paid vacation time, it belongs to the employee and can never be forfeited.
  • An employer may, however, set a reasonable accrual cap on its vacation policy. With a reasonable cap, once an employee reaches a certain level of earned vacation, the employee can no longer accrue additional vacation until some of the existing vacation is used. In order to determine whether the cap is reasonable, employers must consider the amount of vacation offered, the opportunity for employees to take vacation during the year, and the type of business or industry involved.
  • Employers must pay accrued but unused vacation at the time of termination.

Please note that the information contained in this newsletter is not intended to provide specific legal advice. You should consult with an attorney and not rely on any information contained herein regarding your specific situation.

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