With the holidays coming, now is a great time for employers to revisit their vacation policies and practices.  Here are some important reminders about vacation time in California

Offering Employees Vacation Isn’t Mandatory, But Clarity Is

California employers are not required to provide employees with paid vacation benefits.  But if you do, make sure you are communicating the following clearly:

• Who is eligible?  Do you want to offer the benefit only to full-time workers?  Say so!  To avoid confusion or disputes, employers should clearly outline who is eligible for vacation time in their written policies.

• When does vacation accrual start?  Does accrual start on day one?  Do you want employees not to accrue until 90 days have passed?  Be very careful if you delay the start date: for example, if accrual doesn’t start until the 90^th day, the employee’s maximum accrual for that first year should be 75% of a year’s accrual.  In other words, they shouldn’t “super accrue” a year’s worth of vacation in the 9 remaining months.  Otherwise, you will owe them for accrual during the 90 days, if they are terminated in the first year. 

• When can they first take vacation?  You can delay the time employees can use their vacation.  But be careful: if you haven’t limited accrual as detailed in bullet 2 above, or if accrual expressly begins on the first day of employment, you nonetheless will need to pay out accrued vacation if they leave in the first 90 days. 

Be Aware: Vacation Time Is Considered Wages That Accrue as They Are Earned

Unlike sick leave, earned vacation (and this is true of PTO as well) is considered wages under California law. That means it accrues over time and cannot be taken away once accrued/earned.  This means that you cannot have a policy that unused vacation is forfeited.  It also means that upon termination, all unused, earned vacation must be paid out at the employee’s final rate of pay.  This rule also applies to PTO policies (that combine vacation and sick leave) but beware: PTO must be paid at the employee’s regular rate of pay (while vacation can be paid at the employee’s hourly rate).

Caps Are Allowed, Forfeitures Are Not. 

And on that point, be reminded that employers may implement a “reasonable cap” on vacation accrual, meaning that once employees earn the maximum amount, they earn no more until they bring their accrual below the cap (and again on clarity: be clear that accrual begins from the time the employee comes below the cap, not retroactive to the date they capped out).  Does a one year cap on accrual sound reasonable to you?  Rethink that: California’s Labor Commissioner has suggested (not law, but gives us a good sense of what will happen) that capping at the annual accrual rate at one year likely is not reasonable, as it doesn’t provide a fair opportunity to use vacation.  A more reasonable cap may be 1.5 times the annual accrual rate, as it allows employees a realistic chance to use accrued time before accrual stops.

Have You Considered How You Treat Exempt Employees and Vacation (or Other Pay Time Off Benefits)?

Very much in a nutshell (not intended to be legal advice or a full summary, natch): Exempt employees (those who, by virtue of their satisfaction of both a salary and a duties test under state and federal law, lawfully are classified as exempt under the executive, administrative, professional or other exemptions) are paid on a salaried (vs. hourly) basis, and must receive their full weekly salary if they perform any work during the workweek, regardless of the number of hours worked.

What does this mean for you?

• Employers generally cannot deduct from an exempt employee’s regular salary for variations in hours, quality of work, disciplinary reasons, or partial-week closures, or for partial day absences taken by those employees (in this case, for vacation).

• Employers may make deductions from salary in full day absences only, and in very limited circumstances:
  • During the employee’s first or last week of employment (pay only for days actually worked).
  • When an employee absents themselves for a full-day for personal absences, after vacation (or PTO) is exhausted
  • When an employee absents themselves for a full-day for sick leave purposes, after their sick leave bank is exhausted

Stated differently, employers may not deduct partial day absences from an exempt employee’s salary. Ever.

• What an employer may do is may make partial day absence deductions from an exempt employee’s accrued vacation (or PTO) bank, if an employee has that time available. But if this is your intention, this should be very clear in your employee handbook.
• And while this is lawful, there are practical considerations you will want to consider before you make this decision. Remember: if an exempt employee does not have enough accrued vacation (or PTO) to cover the partial day absences, the employer is required to pay the difference to ensure they get their full salary on that day.

Considering a Holiday Shutdown That Includes Mandated Use of Vacation?

There are steps you must follow before you can implement such a policy; namely, sufficient notice and clarity around the policy.   

How Can We Help?

Some of these decisions are legal.  And some of these decisions are practical.  And the risks of getting it wrong can be significant.  Want some help navigating the confusion?  Want to understand how these rules apply to PTO or sick leave?  Want to talk about the pros and cons of flexible (please don’t call it unlimited) time off?  We are happy to help

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