One policy that I find is usually not given the attention it deserves when drafting employee handbooks is the policy for vacation time. There are numerous rules about how employees earn vacation, and it is often tricky to draft a proper policy without someone experienced in this area. Many out-of-state employers assume that their policy complies with California law when setting up operations, but California is unlike most other states when it comes to vacation time. Here are some of the more problematic areas I see arise (for more detailed overview it is worth reading the DLSE’s website explaining the nuances here):
1. No use-it-or-lose-it policies permitted.
Under California law, vacation is treated the same as earned wages and vest as the employee performs work. Because vacation is earned proportionally as the employee works, any type of policy requiring employees to lose vacation that has already been earned is illegal under California law.
2. Reasonable caps are allowed.
While employers cannot implement “use-it-or-lose-it” policies, they can place a reasonable cap, or ceiling, on vacation accrual. The DLSE explains:
Unlike "use it or lose it" policies, a vacation policy that places a "cap" or "ceiling" on vacation pay accruals is permissible. Whereas a "use it or lose it" policy results in a forfeiture of accrued vacation pay, a "cap" simply places a limit on the amount of vacation that can accrue; that is, once a certain level or amount of accrued vacation is earned but not taken, no further vacation or vacation pay accrues until the balance falls below the cap. The time periods involved for taking vacation must, of course, be reasonable. If implementation of a "cap" is a subterfuge to deny employees vacation or vacation benefits, the policy will not be recognized by the Labor Commissioner.
3. Vacation is a formed of earn wages that must be paid out on the employee’s last day of work.
An employee who is discharged must be paid all of his or her wages, including accrued vacation, immediately at the time of termination. Labor Code Sections 201 and 227.3
4. No deductions permitted from employee’s final wages for use of vacation that was not accrued.
Vacation is treated as a form of wages under California law, and by permitting an employee to take vacation time before it is earned, is effectively a loan provided to the employee. It is well established under California law that employers may not utilize self-help remedies to recover debts from the employee’s final pay check.
5. “Cliff vesting” policies are problematic.
While employers may set probationary periods or waiting periods during which employees do not accrued vacation time. However, the DLSE maintains that employers may not have a policy that grants employees lump sums of vacation upon reaching certain dates. The DLSE’s view on this type of “cliff vesting” is that the employer is really attempting to provide for accrued vacation, but at the same time is impermissibly attempting to limit its liability of having to pay out a pro rata share of the accrued vacation if the employee does not work until the date in which the vacation is granted to the employee. It is safer for employers to avoid these lump sum grants of vacation, and simply set a time period (i.e., the employee’s first six months of employment) that the employee does not accrue vacation.
As you can probably tell by now, California law is vastly different than Federal law and other states. It is a trap for employers, but with some understanding of the obligations created under the law it can easily be managed.