But for a new leave statute for spouses of military personnel (See “And Now, Conjugal Visits,” December 2007), the Legislature foisted no particularly substantive obligations upon private employers during the last year. Whether it’s because legislators don’t want to provide fodder for the upcoming presidential election, or because any additional regulation of the employment arena would likely be overkill2, the Legislature’s inaction on this front gives California employers one small reason to proclaim 2008 a potentially happy new year.3
But January still proves an important month for most employers, and many are simply unaware of the significance the new year has on a benefit most employees hold so dear: vacation. That’s right, for many employers, the New Year resets the clock on vacation accruals—providing a timely incentive for ensuring your vacation plan comports with California’s laws.
The rose of another name
While you may think it stinks, the laws governing vacation plans cannot be avoided by simply claiming time off as “PTO” or “personal time.” These alternatively labeled programs generally constitute a vacation benefit, irrespective of name. If it may be used for almost any purpose and is free of most restrictions (except scheduling approval, and so on), then it constitutes “vacation” and is subject to California law. Plans that run afoul of this rule, and which many employers unwittingly think are exempt from vacation rules, are numerous. They include things like personal time and the ubiquitous “floating holiday.” However, the test isn’t the title, but rather how the time off may be used.
The only way around this result is if the programs are subject to sufficient restriction as to their use—such as bona fide sick leave that can only be used for illness and medical appointments. In the absence of these types of restrictions on timing and purpose, your creative nomenclature constitutes vacation.
The basics of vacation obligations
Not to be the Grinch, but employers aren’t obligated to provide any vacation benefits whatsoever to employees. It’s true—no law in California requires any vacation benefit. However, once you offer such a benefit, you’re obligated to provide it in accordance with several legal principles.
No “use it or lose it.” Vacation benefits can’t be subject to forfeiture. In other words, at the end of each year, an employee cannot be forced to give up earned but unused vacation. Such “use it or lose it” policies are illegal because, in California, accrued vacation is deemed “wages” under the theory that companies offer less in direct pay to employees to offset the vacation benefit being offered.4 Because the accrued vacation is wages, an employee must be able to carry over any unused portion of the benefit from year to year.
Cap on accrual. What is lawful, however, is to “cap” the accrual at some set amount in excess of the yearly accrual rate. In other words, if employees can accrue up to two weeks of vacation per year, and they don’t use that vacation, they can carry it over and continue to accrue an additional amount to a predetermined cap. While there’s no bright line test for what constitutes a lawful cap, conventional wisdom is that a cap of no less than 1.5 times the annual accrual rate will generally satisfy the Department of Labor Standards Enforcement. But if you’re an employer who’s so busy employees don’t get much of an opportunity to take vacation, a higher cap rate could be required. Once the cap is reached, an employer can then prohibit any further accrual until some vacation is used.5
Annual payout. A lawful alternative to “carry over and cap” is to payout employees for any accrued-but-unused vacation at the end of each year. This is, quite possibly, the easiest from an administrative perspective, and it has the added benefit of being paid out at the employee’s then-rate of pay (which, one might presume, will be lower than the rate of pay in the future.)
Payout at termination. Vacation’s nature as “wages” also requires it be paid out at the time of termination. Thus, employees eligible to accrue vacation, who haven’t used all their accrued vacation, must be paid out the balance at the time of termination. This is required irrespective of whether the employee quits or is involuntarily terminated. A failure to do so could result in assessment of penalties of up to one day’s pay for each day (up to 30) that payment is delayed after the termination of employment.
With the new year having just started, now may be a very good time to review your vacation plan (whatever you might call it) to ensure this issue doesn’t become the thorn in the side of an otherwise rosy 2008.
1 Potentially the calm before storm!
2 The understatement of the decade.
3 There are some changes stemming from past legislation that do go into effect. The minimum wage increases to $8 per hour and, effective July 1, individuals will be prohibited from using a cell phone while operating an automobile unless using a hands-free device.
4 Clearly, the person who came up with this theory hasn’t attempted to hire in today’s competitive labor market. One more reason I propose that no individuals should be elected to a legislature unless they’ve run a small business.
5 How this reconciles with the “vacation as wages” theory is incomprehensible.
