As employees begin planning for winter vacations and time off to celebrate, it’s a good opportunity for California employers to review the state’s unique rules regarding vacation policies. To help navigate these complexities, this Friday’s Five highlights five critical vacation policy issues that can create challenges for California employers during the holidays:

1. “Use-it-or-lose-it” policies are prohibited.

Under California law, vacation time is treated as earned wages and accrues as employees work. This means employees cannot lose accrued vacation once it’s earned. Policies requiring employees to forfeit unused vacation time at the end of the year or before the holidays are not permitted. Employers must ensure their policies reflect this rule to avoid liability.

2. Reasonable caps on vacation accrual are allowed.

Although “use-it-or-lose-it” policies are illegal, employers may set reasonable caps on vacation accrual. A cap limits how much vacation time an employee can accrue.

The DLSE explains that once the cap is reached, additional vacation does not accrue until the employee uses some of their accrued time. However, the cap must be reasonable and not designed to deny employees their earned benefits. For example, a cap equivalent to 1.75 times an annual accrual has been considered reasonable by the DLSE in the past, but employers must consult counsel when setting a vacation cap. 

3. Accrued vacation must be paid out when employment ends.

With many employers and employees reevaluating roles during the new year, it’s important to remember that any unused, accrued vacation must be paid out as part of an employee’s final paycheck. California law treats vacation as earned wages, and it must be included in final pay under Labor Code Sections 201 and 227.3. Employers should ensure final paychecks are accurate and issued on time to avoid penalties.

4. Final wages cannot include deductions for unaccrued vacation.

Some employees may take vacation time during the holidays before fully earning it. While this is often treated like an advance, California law prohibits employers from deducting any “negative balance” from an employee’s final paycheck. Self-help remedies, such as recovering these unaccrued amounts directly from wages, are not allowed.

5. “Cliff vesting” vacation policies are problematic.

Employers may establish probationary or waiting periods during which employees do not accrue vacation time. However, policies granting a lump sum of vacation only after reaching a specific milestone—like a one-year anniversary—can create legal risks.

The DLSE views such “cliff vesting” as an attempt to avoid paying pro rata vacation if an employee separates before the milestone date. Instead, employers are encouraged to set a waiting period during which no vacation is accrued (e.g., the first six months) rather than using lump-sum grants tied to specific dates.

California law governing vacation policies is stricter than federal laws and those of other states. Employers who understand these rules can better manage holiday schedules, support employees during the winter break, and avoid potential legal pitfalls. By planning ahead, the holiday season can be a stress-free time for both employers and their teams.