Waiting Periods for Vacation Reaffirmed – A Win for Employers

by | Sep 28, 2017 | Fall 2017 Newsletters

By Susan Breslauer, SPHR-CA, SHRM-SCP

Vacation and paid time off (PTO) are optional benefits, not required by law in California.  However, if vacation/PTO is provided to employees, it is considered a deferred wage.  (PTO is usually a combination of vacation and sick leave. For this article we speak to vacation, but PTO is also covered.)  This means that once vacation is earned, it cannot be taken away.  Overall, there are not many rules regarding vacation.  Labor Code 227.3 covers the “no forfeiture” requirement;  there have been a few court rulings and Department of Labor Standards Enforcement (DLSE) Opinion Letters on various vacation provisions.  Otherwise it is up to employers to define how their vacation practices work.  Some of the vacation rules CA employers must follow include: 

  • Employers may not have a “use it or lose it” policy, but vacation earnings can be limited by imposing a maximum “cap”. 
  • Employers can impose a waiting period before vacation is earned. 
  • Employees must be compensated for paid vacations, and to be paid a lump sum upon termination if they have accrued, unused vacation.

 

Employers have received a win in a recent case regarding the waiting period for vacation in Minnick v. Automotive Creations, Inc. No. D070555 (Cal. Ct. App. 4th Jul. 28, 2017).  The plaintiff left the company after six months of employment.  He was not paid any vacation because the employer had a one year waiting period before vacation was earned.  The court deemed the employer’s policy was written unambiguously and lawfully. Here’s the key language:

 
All employees earn [one] week of vacation after completion of one year [of] service and a maximum of two weeks’ vacation after two years of service. This means that after you have completed your first anniversary with the company, you are entitled to take one week of paid vacation, and after the completion of two years’ service, you will accrue two weeks [of] paid vacation per year. This does not mean that you earn or accrue 1/12th of one week’s vacation . . . each month during your first year. You must complete one year of service with the company to be entitled to one week [of] vacation.

The employee challenged the employer’s vacation policy arguing that the policy unlawfully contracted around the rule against forfeiture of vacation wages and the employer’s policy did not clearly provide for a waiting period.  The trial court entered into judgement in favor of the employer, and the plaintiff appealed.

 

The Court of Appeal then affirmed the trial court’s ruling and ruled that an employer may lawfully decide not to provide vacation at all, and it can provide vacation after a specified waiting period.  Once an employee becomes eligible to earn vacation benefits, he/she is entitled to payment for unused vacation upon separation and cannot forfeit this entitlement.  (CA Labor Code 227.3)

 

The key take aways from this case are: 1) the vacation policy must state the waiting period before vacation accrual can begin; it should be clear that vacation does not accrue at all until the waiting period has been completed, and 2) vacation may not be forfeited after it has been accrued.  Although this is not new, it provides a definitive statement that the employer may define how and when vacation is earned.  Minnick v. Automotive Creations, Inc. is the first case to validate a one-year waiting period.

This case is a good reminder that detailed, written vacation policies are important.  We continue to recommend that Paid Time Off policies are separate and distinct from CA Paid Sick Leave (PSL), since PTO is a deferred wage and PSL is not.  Also, it is recommended that the waiting period is stated in the policy, the offer letter, and explained to employees during new hire orientation.  Silvers HR has a legally-reviewed vacation/PTO policy available for its retained clients.

You didn’t ask, but….  Just because an employer can require a lengthy waiting period before vacation is earned does not mean it is a competitive practice.  

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