As an employer in California, it is important to be aware of the state’s vacation policies that are unique to California. Below are some regulations in California that employers need to be aware of to remain compliant with California law.  This Friday’s Five is a reminder of five issues on vacation policies that can create traps for California employers:

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, policies requiring employees to lose vacation already 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 form of earn wages that must be paid out according to final pay requirements
An employee who is discharged must be paid all of his or her wages, including accrued but unused vacation, immediately at the time of termination. See Labor Code Sections 201 and 227.3.  More information about the timing and payment of final wages can be read here.

4. Deductions not allowed from employee’s final wages for unaccrued vacation time
Vacation is treated as a form of wages under California law, and by allowing employees to take vacation time before it is earned is similar to providing a loan.  Employers may not utilize self-help remedies to recover debts from the employee’s final paycheck, including deducting wages owed to an employee to cover vacation that time was used but had not yet been accrued by the employee.

5. “Cliff vesting” policies are problematic
Employers may set probationary periods or waiting periods during which times employees do not accrue vacation time. However, the DLSE maintains that employers may not maintain a policy that grants employees a lump sum of vacation upon reaching certain dates (for example, such a policy would grant the employee five days of vacation at the employee’s one year anniversary of work, but not permit the employee to take any vacation prior to the anniversary date).

The DLSE’s view on this type of “cliff vesting” is that the employer is attempting to provide for accrued vacation, but at the same time is 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 the vacation is granted to the employee.  Many employers avoid these potentially problematic 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.

California law regarding vacation policies is vastly different than federal law and other states. It is essential for employers to understand these obligations to avoid falling into legal traps. As we start 2023, it’s a good time to review and update your company’s vacation policies to ensure compliance.