Vacation Pay

The California Labor Code does not require employers to offer paid vacation time. However, if an employer does offer a vacation program, the Labor Code regulates how that program is implemented. These regulations stem from one central premise: most paid vacation time is the equivalent of wages in that it has been earned based on how many hours you have worked. Thus, you are entitled to all earned but unpaid wages, including unused vacation time, when you separate from your employer.

Some employers try to avoid paying unused vacation to employees who separate. There are a number of creative schemes that some employers have developed in an effort to circumvent the Labor Code. The Division of Labor Standards and Enforcement (“DLSE”), which enforces the relevant portions of the Labor Code, is aware of these practices. The DLSE applies the principles of “equity and fairness” when determining whether a novel vacation program is legally compliant. If your employer uses a complicated set of vacation policies to deny you a vacation payout, don’t take their word for it. Call Spencer Young Law today to determine whether your employer has violated the principles of equity and fairness.

If your employer offers vacation and fully complies with the Labor Code, then you probably have a “vacation bank” on your wage statements indicating the number of vacation hours available. If this number increases over time, it is because you have “earned” more of it with more hours of work. Thus, the number of available vacation hours is directly tied to your labor.

On the other hand, an employer may offer “unlimited vacation” or a fixed number of “flex days.” Such programs do not tie the number of available paid days off to the amount of time you have spent working, so these benefits are not considered earned wages.

Example 1: Terry works for a private elementary school. The school’s policy is that all employees accrue 1 day of vacation per month, starting after 1 year of full-time employment. Employees are only allowed to use up to 15 vacation days in one year. Terry has worked there for 5 years and has never used a vacation day. Now she wants to retire. Terry’s vacation time is considered wages earned, because its availability correlated with her time spent working. The school is acting lawfully by restricting vacation to employees who have worked at least one year. It is also lawful to cap her actual use of vacation in one year, provided that she is paid for all 60 hours she has accrued when she retires.

Example 2: Ahmad works for a mid-sized insurance agency. The company’s vacation policy is as follows: “Earn 1 hour of vacation for every 20 hours worked, but no more than 80 hours of vacation may be earned in a year.” Effectively, this is a cap on accrual, not on usage. This is lawful provided that the company enforces its policy consistently, keeps accurate records of vacation accrual, and pays for all vacation earned under this policy.

Example 3: Kyona works for a global tech giant. To recruit top talent, the company advertises its “unlimited vacation” policy. In practice, there are obvious limits to when Kyona can take time off. However, whenever possible, supervisors do approve her vacation requests. In 2019, she used 20 paid days off. Kyona’s “vacation bank” on her wage statement does not change from one pay period to the next. It simply says “unlimited vacation.” Kyona quits her job. Because Kyona was not accruing vacation tied to her time spent working, this benefit is not wages earned. Kyona is not entitled to a payout at the time of her separation.

Example 4: Lavan works at a bank. He accrues 1 hour of paid vacation for every 40 hours worked. He is required to use vacation within 15 months of when it was accrued or he loses what he didn’t use. This is an illegal revocation of earned wages. While an employer may cap accrual and cap usage, it may not simply erase an existing bank of vacation time already earned. When Lavan separates, he will be entitled to a payout.

Because vacation pay is considered wages, failure to pay for all vacation at separation can lead to waiting time penalties. This can significantly increase the value of your vacation claim. If your employer is denying your vacation pay, or if you have questions about a complex vacation policy, call Spencer Young Law today for a free consultation with an experienced wage and hour attorney!