- January 8, 2019
- Posted by: alohawms
- Category: Benefits, Human Resources, Payroll, PEO & ASO
By Sachi Barreiro, Attorney #repost
In California, employers are not required to provide any paid vacation or paid time off (PTO) to their employees. However, studies have shown that giving employees time off to relax benefits not only employees, but also employers. Happier, healthier employees usually mean greater productivity and employee retention for employers. Because of this, many employers choose to offer vacation as a benefit of employment.
Employers who choose to offer vacation must follow certain guidelines. California law considers accrued vacation to be a form of wages that have already been earned by the employee. Among other things, this means that accrued vacation cannot expire and must be paid out to an employee upon termination or separation from the employer. The same rules apply to PTO.
Sick leave is not subject to the same rules as vacation and PTO. As of July of 2015, California employers are required to provide a minimum number of paid sick days per year. (To learn the rules on eligibility and accrual, see our article on California paid sick leave)
In general, vacation accrues over time as an employee works. For example, if a vacation policy gives an employee ten days of vacation each year, he or she will accrue five days of vacation after working for six months.
Employers can designate a waiting period at the beginning of employment before vacation starts to accrue, though. The waiting period often correlates with the 90-day introductory period, but can be as long as the first year of employment.
Employers can also give vacation to certain groups of employees but not others, as long as they don’t discriminate based on a protected characteristic, such as race or gender. For example, employers may give vacation only to full-time employees or only to managers.
Reasonable Cap on Vacation Accrual
Unlike some other states, California does not allow “use-it-or-lose-it” vacation policies. Under a “use-it-or-lose-it” policy, accrued vacation must be used by a certain date – usually by the end of the year – or it is forfeited. Because accrued vacation is considered earned wages, use-it-or-lose-it policies are seen as illegally withholding wages owed to employees.
Employers can, however, place a cap on vacation accrual. In other words, once employees reaches a certain number of days, they will stop accruing vacation until they use some of their vacation. This allows employers to maintain some control over vacation accrual and prevent employees from racking up unreasonable amounts of vacation time.
While there’s no set number for a permissible cap, the California Department of Labor Standards Enforcement (DLSE) – the agency that enforces California wage and hour laws – has provided some guidance. In the past, the DLSE has held that a vacation cap could be no less than 1.75 times the annual accrual rate. However, the DLSE has since withdrawn that bright line rule and instead states only that the cap must be “reasonable.” While a 1.75 cap is probably still the safest ratio, a 1.5 cap may also be within legal limits. The example below shows how the vacation cap works.
Example: Sunshine Inc. provides all full-time employees with ten days of paid vacation each year. Sunshine’s vacation policy has a cap of 1.75 times the annual accrual rate, or 17.5 days (1.75 × 10 days). An employee’s vacation will roll over year to year, but once he or she reaches 17.5 days, no more vacation will accrue until the vacation bank falls below that amount.
Employers have a lot more freedom to shape their vacation policies when it comes to scheduling. In general, employers can decide when and how employees may schedule their time off from work. An employer may, for example, require that employees submit vacation requests a certain number of days or weeks in advance. Employers can also set aside certain “blackout” dates during which no employees may take vacation, such as the holiday season for a retail business or the tax season for an accounting firm. And, an employer can place limits on the number of employees who can be out on vacation at the same time.
As long as the employer’s decisions are not discriminatory based on race, sex, religion, disability or another protected class under federal or California law, the employer is free to set the parameters in which vacation is scheduled.
Payout of Vacation on Separation
All accrued, but unused, vacation must be paid to an employee who separates from the employer. Vacation is considered earned wages and must be paid at the same time as the employee’s final wages:
- If an employee is fired, the final paycheck is due at the time of discharge.
- If an employee quits with 72 hours’ notice, the final paycheck is due at the time of quitting.
- If an employee quits with less than 72 hours’ notice, the final paycheck is due within 72 hours of the time of quitting.
Paid sick days that are part of a separate sick leave policy are not subject to the same rules and do not have to be paid out when an employee leaves the company. However, when sick days are included in a general PTO policy, all of the PTO is treated like vacation and must be paid out on separation.
Personal Days and Floating Holidays
Some employers also offer a set number of “personal days” or “floating holidays” each year. In general, holidays that are tied to a specific event don’t need to be paid out upon separation. For example, if an employer offers paid holidays for Christmas, New Year’s, or the employee’s birthday or work anniversary, these do not need to be paid out. But, when the personal days or floating holidays are not tied to a specific event, and may be taken at any time during the year for any reason, they are treated as vacation. In other words, personal days or floating holidays cannot be subject to a use-it-or-lose-it policy and must be paid out upon separation.
Advances on Vacation
Employers are free to advance vacation to employees, but they cannot deduct advanced vacation from a final paycheck if an employee leaves earlier than expected. For example, if an employee has only one week of accrued vacation, but takes two weeks of vacation and then quits, the employer cannot deduct the week of vacation from his or her final paycheck.
Waiting Time Penalties
Because vacation is considered earned wages, an employer may be liable for “waiting time penalties” for failing to timely pay out vacation with the final paycheck. The waiting time penalty is the employee’s average daily wage, for up to 30 days. Employees who don’t receive their vacation in their final paychecks can file a wage claim with the DLSE, or sue in court, to recover this penalty.