California Vacation Pay



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Quick Summary

Vacation pay benefits are voluntary in California. But, if provided as an employee benefit, earned but unused pay cannot be forfeited and must be paid upon termination of employment. An employer can, however, cap the amount of vacation pay that is earned.


Law Review

Vacation pay is not required in California

There is no law in California requiring that employees be provided with paid vacation time. Of course, most employers provide this benefit to at least their full-time employees so that they will attract and retain good employees.

Vacation pay is considered earned wages

When an employer does provide for paid vacation time, this time constitutes earned wages. (Labor Code § 227.3) It is not considered a gift or gratuity, but as additional wages for services performed. (Suastez v. Plastic Dress-Up Co. (1982) 31 Cal.3d 774, 779.) There are two very important provisions to section 227.3:

First, the employees must be paid as wages their earned but unused vacation time when they leave employment.
Second, earned vacation time cannot be forfeited. An employee cannot forfeit earned but unpaid wages, and this principal also applies to vacation pay.

Vacation pay is earned daily

Vacation time is earned proportionately as labor is rendered. Upon termination, an employee is entitled to a pro rata share of vested vacation pay. Vacation pay is not considered to be an inducement for future services, but is instead compensation of past services. (Suastez v. Plastic Dress-Up Co. (1982) 31 Cal.3d 774, 782.) In Suastez, the employer had a policy that one week of vacation time was earned after one year of employment. The Supreme Court held that the vacation time did not "vest" after one year, but instead "vests" on a pro-rata basis as it is earned. Thus, after six months, an employee would have earned one-half week of vacation notwithstanding the company policy. This also means that if an employee is terminated mid-year, they are entitled to their accrued vacation pay up until the time of termination.

However, an employer can have a policy that prevents vacation pay from vesting for a certain period of time. For example, there may be 60-day probationary period during which vacation time does not accrue.

Earned vacation pay may be capped

An employer will often find it desirous to limit the amount of vacation time an employee can earn. Since earned vacation time is considered wages, it is unlawful to have a use it or lose it policy. Earned wages cannot be forfeited by an employee. Likewise, earned vacation time cannot be waived by an employee for failing to use it. Even if an employee knows the employer has a use it or lose it policy and voluntarily refrains from taking vacation, the employee does not waive their right to be paid for accrued but unused vacation. (Henry v. Amrol, Inc. (1990) 222 Cal.App.3d Supp. 1, 3.)

A limit to earned vacation time, however, can be obtained by using a no additional accrual policy. The rule is that unused vacation will automatically accrue unless limited by a lawful company policy. (Boothby v. Atlas Mechanical, Inc. (1992) 6 Cal.App.4th 1595, 1598.) A "use it or lose it" policy is illegal in California, whereas a " no additional accrual" policy is legal.(Id.. at 1601.) An older case implying that vested vacation time can be forfeited via a "clearly and expressly stated" employment policy (Berardi v. General Motors Corp. (1983) 143 Cal.App.3d Supp. 7, 12-13, is not good law and has been subsequently disapproved of through later cases. (See, e.g., Henry v. Amrol, Inc. (1990) 222 Cal.App.3d Supp. 1, 7, fn. 1.)

Employers can control when vacation time is used

An employer has the right to control when vacation time is taken, and how much can be taken at one time. An employer can thus prevent all of its employees from taking vacation leave at the same time, and limit how much vacation may be taken at a time, in the event an employee has accrued several months of vacation time. (Boothby v. Atlas Mechanical, Inc. (1992) 6 Cal.App.4th 1595, 1602, referring to Suastez v. Plastic Dress-Up Co. (1982) 31 Cal.3d 774, 779 fn. 7, and Henry v. Amrol, Inc. (1990) 222 Cal.App.3d Supp. 1, 5.)

However, the Sequeira court did note that if the company had an illegal "use it or lose it" policy, then as a matter of equity the statute of limitations would have been tolled and the employee would have been entitled to all 12 years of accrued vacation pay.

Vacation pay is paid at the employee's current wage

Vacation pay is paid at the employee's current (or final) rate of pay, and not their rate of pay when the vacation time accrued. (Labor Code § 227.3.) This is so even though vacation pay is considered a form of deferred compensation. (Suastez v. Plastic Dress-Up Co. (1982) 31 Cal.3d 774, 779-780.) Assume an employee earns 10 days of vacation time while earning $10 per hour. The employee then earns another 10 days of vacation while earning $15 per hour. The employee then leaves employment. The employer is obligated to pay the employee 20 days of vacation time at a $15 per hour rate.

Of course, an employer cannot reduce an employee's rate of pay shortly before terminating them as a tactic to reduce the amount of earned vacation to be paid. Indeed, an employer can never reduce the amount payable for accrued vacation time by demoting an employee or reducing their wages, even for an admittedly proper purpose, because to do so would cause a forfeiture of earned wages. (See Henry v. Amrol, Inc. (1990) 222 Cal.App.3d Supp. 1, 5 (the law "prohibits a policy which allows the employer to reduce his employee's wages for services after the service has been performed.")

Paid Days Off

Some employers give their employees a set number of paid days off during the year, which may be used as vacation time, sick leave, or for any purpose. These paid days off are considered to be vacation time and are earned wages. (Labor Commissioner Interpretive Bulletin 86-3, paragraph 8.)

Frequently Asked Questions

Is my employer required to give me vacation time?

No.

I want to take my vacation after Christmas but my employer will not let me. Is that legal?

Generally yes. An employer must permit vacation time to be taken, but can reasonably restrict when and for how long, especially if there may be detrimental impact upon the business.

Company policy is that ten days of vacation are earned after one year. I was fired after working nine months. Do I get paid any vacation time?

Yes. You are entitled to 7.5 days of vacation pay.

I have accrued 10 weeks of vacation time, but my employer will only allow me to take up to 3 weeks at a time. Can he do this?

Yes.

I earned a week of vacation while earning $8 per hour. I receive a raise to $10 per hour and then let go. I was paid for my vacation time, but at an $8 per hour rate. Should I have received vacation pay at $10 per hour?

Yes.

More Information is Available with a Premium Subscription


  • Helpful vacation law interpretations by the Labor Commissioner: 87-7 and 86-3


  • Text of pertinent statutes


  • Legal resource of California cases discussing vacation pay law


  • Use it or lose it, what does it really mean? Sample illegal vacation policy and sample legal policy.


  • Limits on owed vacation pay. Although earned wages, learn why a 30-year employee who has never taken a day of vacation does not need to be paid for 30-years of accrued vacation when their employment ends. But also learn what can cause the employer to still have to pay the full 30-years of untaken vacation time!



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