Many employers receive a significant increase in vacation requests during the summer compared to other seasons. Nevertheless, employers often find that some employees accumulate large vacation balances, which can be worrisome from a cost perspective. Given these trends, and now that we are half-way through the year, this is a good time for California employers to ensure that their vacation policies are compliant with state law. Below are some common mistakes that California employers often make with vacation and the governing legal requirements to be aware of so that those mistakes may be avoided.
Mistake #1: Implementing a “Use It or Lose It” Policy
First, under California law, vacation accruals are considered wages, which vest once earned. This means that as soon as employees accrue vacation or PTO, the time belongs to them until they use it or they separate from the company. Thus, a policy that provides for forfeiture of vacation time that is not used by the end of the year or some other specified date (“use it or lose it”) is unlawful.
Mistake #2: Not Properly Placing a “Cap” on Time Accrual
Second, employees can accrue vacation time indefinitely unless the employer affirmatively places a “cap” or “ceiling” on the accrual. The cap places a limit on the amount of vacation that can accrue so that once an employee reaches a certain level of accrual set by the cap, the accrual freezes and no further vacation accrues until the employee uses enough time to bring the balance below the amount of the cap. To place a cap on vacation time accrual, however, it is important for employers to maintain a written policy that clearly communicates the existence of the cap, the amount of the cap and how the cap operates.
Mistake #3: Placing an Unreasonable Cap on Accrual
Third, placing an unreasonable cap on vacation accrual renders a cap unenforceable. While there is no set number for a permissible cap, the amount of the cap must be reasonable in order to allow employees to actually use their vacation time. It is common for employers to set the cap anywhere between 1.5 to 2 times the annual accrual amount. For example, for an employer who grants employees 80 hours of vacation in a year, the cap may be set at 120 to 160 hours. Whether a particular cap is reasonable will vary depending on the particular circumstances involved.
Mistake #4: Not Timely Paying Out All Accrued, but Unused Vacation Time when Employees Separate from their Employment
Fourth, employees are entitled to receive payment for all accrued, but unused vacation time when they separate from their employment, regardless of whether the separation is voluntary or involuntary. Payment for accrued, but unused vacation time is due at the same time as the employees’ final wages, which must be paid at the time of termination or within 72 hours of separation if an employee resigns without providing advance notice. Typically, vacation time is paid out at employees’ final rate of pay unless a written policy provides otherwise. For this reason, employers typically want to avoid “front-loading” vacation benefits whereby employees are granted all of their benefits at once rather than slowly accruing it throughout the year. By front-loading vacation benefits, employees are not only entitled to use all of the vacation time immediately, but they are also entitled to be paid for all of the unused vacation even if they leave their employment shortly after it was front-loaded.
Mistake #5: Not Adjusting Accrual Policies for Probationary Periods
Fifth, employers may implement a probationary period—typically 90 days—during which newly-hired employees do not accrue any vacation. In this situation, if employers do not adjust the accrual method used during the first year of employment, new employees will not likely accrue the full amount of vacation benefits that they are eligible to receive under the policy. For instance, if the vacation policy provides that employees are eligible to receive two weeks of vacation, using the same accrual method for both year one and year two will result in a new employee accruing only about three-fourths of the eligible vacation during the first year. To avoid that result, employers can either use a higher accrual rate during the first year or clearly state in the written policy that employees are only eligible to receive a lesser amount of vacation during the first year
Mistake # 6: Unintended Consequences of Unlimited Vacation Policies
Sixth, employers may decide to adopt an unlimited vacation policy so that they do not have to worry about accruals or pay out accrued, but unused vacation at the time of separation. Under this type of policy, there is no limit on how much time employees can take time off from work as long as they are still able to complete their work. Although unlimited vacation policies are permissible and avoid many problems, such policies come with their own set of potential mistakes.
One common mistake is that an employer with an unlimited vacation policy could suggest or encourage employees to use a certain amount of vacation time each year. Some courts have interpreted such conduct as transforming the unlimited vacation policy into an accrued or guaranteed policy whereby the employees accrue the amount of vacation time that the employer suggests or encourages.
Another common mistake is not clearly differentiating between vacation time and leaves of absence in the written policy. Absent clear policy language to the contrary, an employee who, for example, takes 12 weeks off work to recover from a medical condition may be entitled to their full pay under the unlimited vacation policy rather than only an unpaid leave of absence. Thus, policy language clearly defining when an employee transitions from paid vacation to an unpaid leave of absence is essential.
If you have questions regarding vacation time or any other issue related to employment law, please contact Shirley Jackson Farboud or your regular Lathrop GPM attorney.