Question:

Your recent article discussed the rules regarding vacation as a form of wages, and employer-imposed caps on the amount of vacation that employees can accrue. Do these rules also apply to officers of a corporation? I also wanted to know whether an employer could consider a bonus which was already given to an employee as some form of “in lieu” payment for accrued vacation, thereby reducing the number of the employee’s previously earned vacation hours.

Answer:

As you mentioned in your question, vacation time is considered a form of wages which vests once it is earned by an employee. This means that once an employee has earned vacation time, it becomes like money in the bank and cannot be taken away by the employer. This is the reason that “use it or lose it” vacation policies, which would otherwise require an employee to forfeit accrued vacation time if not used by a certain date, are specifically prohibited by California law. Because accrued vacation time is treated like unpaid wages, an employer is required to pay an employee for any accrued and unused vacation time at the time of the employee’s separation from the company, regardless of the reason for the separation.

Employers are not required by law to provide their employees with vacation time, which means that vacation policies are entirely at the discretion of the individual employer. If an employer does offer its employees vacation time, it has the option of reasonably “capping” the amount of accruable vacation at a predetermined amount. This type of policy allows an employer to limit the amount of vacation that an individual employee can accrue—once that limit is reached, the employee ceases to earn additional vacation time until he or she uses up some of the already accrued vacation. This prevents employees from amassing huge amounts of unused vacation time.

Typically, an employer’s vacation policy will apply equally to all of its employees, which could include officers of a corporation. If such an individual were classified as an “employee,” then he or she would be entitled to the same rights enjoyed by the rest of the employees, which would include the company’s vacation policy. However, an employer may also implement different policies for different levels of employees, excluding some classes or providing greater benefits to others. For example, senior management may be entitled to different vacation benefits than administrative employees. If an employer chooses to provide different levels of benefits for different classes of employees, those policies should be clearly set forth in the company’s employee handbook. Your company may therefore provide different benefits (including vacation time) for its corporate officers, though it should clearly describe the varying benefit policies in its handbook.

In regards to bonuses being given in lieu of vacation time, an employer cannot retroactively reduce accrued vacation time based on a bonus that was already paid. Because vacation time belongs to the employee once he or she earns it, the employer cannot take it away. Some employers offer their employees a “cash out” policy, which allows them to accept pay for their unused accrued vacation time. However, this is different than taking away already-earned vacation time because it is done with the employee’s prior knowledge and, typically, at the employee’s request. To inform an employee, after the fact, that a bonus he or she previously received will reduce his or her accrued vacation time would be to forcibly and unlawfully take earned vacation time from the employee. In addition, a “bonus” is typically provided by an employer as a type of reward, such as for exemplary sales or for meeting other performance goals. Bonuses are therefore, by their nature, something that an employee would not otherwise be entitled to. In contrast, vacation time is earned by an employee and becomes a vested right once it is earned—to erode that right with a “bonus” would contradict the rule that earned vacation time can never be taken away.

As noted above, employers can protect themselves from excessive accrual of vacation by implementing caps on the amount of vacation time that employees can earn. This protects the employer in two ways. First, it prevents an employee from amassing such a large amount of vacation that his or her absence while using that vacation would be detrimental to the operation of the company. Second, and possibly more importantly, capping an employee’s accruable vacation means that when the employee ultimately leaves the company, the employer will not be liable for thousands of dollars worth of unpaid vacation time to which the employee would otherwise have been entitled.
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