Question: I started a new business and have many questions about vacation for employees. Is this required? Can I implement a “use it or lose it” policy? Can I control and limit the employees’ vacation and policy structure? Can I advance vacation hours to employees? Can employees share vacation?
Answer:
Vacation Benefits Are Not Required
In California, employers are not required to provide paid or unpaid vacation benefits. However, if an employer chooses to voluntarily offer these benefits, the employer must follow strict rules on how a vacation policy may be structured and implemented. For example, employers cannot adopt “use it or lose it” policies, cannot impose an unreasonable “cap” on vacation accrual, and must pay out any accrued and unused vacation hours upon separation of employment. These restrictions and some general information regarding vacation policies are summarized below.
“Use it or Lose it” Policy
The California Supreme Court in Suastez v. Plastic Dress–Up Co. (1982) 31 Cal.3d 774, held that vacation pay is a type of wage or deferred compensation for services performed that vests throughout the course of employment. This means that accrued vacation hours are “wages” that cannot be forfeited if they are not used. Accordingly, a policy that provides for the forfeiture of vacation pay that is not used by a specified date (“use it or lose it”) is an illegal policy under California law and will not be recognized by the Labor Commissioner. However, as discussed below, the employer may reasonably limit and control the vacation policy’s structure and benefits before they vest.
Employer’s Right to Structure Vacation Policy and Control Before Benefit Vests
Although employers cannot require forfeiture of already vested vacation, employers still have broad discretion to control the mechanics of their vacation policies. Courts have recognized that employers may impose reasonable accrual caps, require waiting periods before vacation begins to accrue, and limit and control the vacation scheduling at a particular time and amount. For example, an employer may choose to implement a reasonable cap such as two times the annual accrual. This prevents an employee from saving up and accruing an indefinite amount of vacation. An employer may also choose to prevent employees from taking vacations during certain busy months. Moreover, an employer may provide different vacation accruals to different categories of employees. For example, an employer may provide more vacation to long-term employees and less vacation to newer employees or seasonal employees. These are permissible and critical tools to help small businesses limit their vacation policy liability.
Advance on Unearned Vacation
Employers may choose to advance vacation hours to employees before it has been earned. However, this practice may create risk because vacation pay vests only as labor is performed. If employment terminates before the employee earns sufficient vacation to offset the advance, recovering the unearned balance may conflict with California wage protections that prevent employers from deducting amounts from an employee’s final paycheck. Employers who choose to implement a policy that allows a vacation advance should ensure that all aspects of the policy comply with applicable wage and hour laws.
Share Vacation to Others
California law does not expressly authorize the sharing or donating of vested vacation time. Because accrued vacation is treated as wages, any leave-sharing program must be carefully structured to avoid violating wage assignment restrictions and strict requirements for IRS special tax treatment. As a result, implementing vacation-sharing programs could create complex legal and compliance issues, including administrative burdens, privacy concerns, potential discrimination claims, and cash flow implications.
Employers who wish to provide vacation benefits to employees should contact their HR consultant or labor counsel to ensure the policy’s terms and implementation comply with these rules.