Question:

Our company is considering adopting a paid vacation policy for our employees. We have not been able to give pay increases or bonuses due to the economy, but we thought giving a few days of paid vacation each year might help improve morale. We can’t afford to give much, and we don’t want to give our newer employees vacation. What do we need to know about instituting a vacation policy?

Answer:

Many employers provide paid vacation time to allow their employees periods of rest and relaxation without suffering a loss of wages. California law does not require paid vacation, and therefore the employer’s vacation policy governs most aspects of the accrual and use of vacation. However, if your company adopts a vacation policy, there are certain laws it must follow, and practical considerations to take into account.

  • Adopt a written policy and apply it consistently. The policy is important to communicate the details of the accrual and use of vacation benefits. Consistent application of the policy is important to ensure fair treatment of employees and to minimize claims of discrimination.
  • Decide which employees will be eligible for paid vacation. The law allows employers to provide vacation benefits to certain classifications of employees, while excluding others. For example, an employer may provide vacation only to full time employees, or only to employees in a certain department. Be certain the classifications of employees who receive vacation benefits are not discriminatory, but are instead based on legitimate business reasons.
  • Define when vacation benefits will begin to accrue. Some employers allow employees to accrue vacation benefits from the date of hire, while others require employees to complete an introductory period or defined period of work (e.g. 1 year) before vacation begins to accrue.
  • Decide how much vacation your employees will accrue. Many employers have a tiered accrual system, so employees earn more vacation the longer they work for your company.
  • Understand that accrued vacation is a vested benefit that is earned incrementally as the employee works. The California Supreme Court has held paid vacation time “is not a gratuity or a gift, but is additional wages for services performed.” Because vacation is a vested benefit, it cannot be forfeited, and must be paid to the employee. Vacation will normally be paid out when the employee takes vacation or when employment ends. Some employers choose to pay employees for their accrued but unused vacation at the end of the calendar or fiscal year.
  • Define the procedure for requesting vacation. The policy should instruct employees to submit their vacation requests in writing, to a designated person, in advance. If your company needs all employees during certain peak times, your policy should state that employees are not eligible to take paid vacation on those days.
  • Your company cannot have a “use it or lose it” vacation policy that states that employees will lose their accrued vacation if it is not used within a certain time. “Use it or lose it” vacation policies are not legal in California. Instead, your company can “cap” the accrual of vacation so that once an employee has earned the maximum vacation no additional vacation will accrue until the employee takes some vacation and their accrued vacation hours fall below the “cap.” California law requires the employer to allow the employee a “reasonable” amount of time to use vacation after it is earned. Although the law does not define what constitutes a “reasonable” amount of time for an employee to use his or her vacation time, a “cap” of two times the employee’s annual accrual is generally considered permissible. Remember the employer is allowed to “cash out” an employee’s accrued vacation by paying the employee the value of the vacation time if the employer wants to avoid a carry over of vacation time from one year to the next.
  • Vacation must be paid to the employee upon separation of employment at the employee’s rate of pay at the time of separation.

Many employers find that providing paid vacation improves morale and employee productivity. The benefits of a paid vacation policy can outweigh the costs of the benefit, and promote employee loyalty and satisfaction. Those goals can be achieved by implementing a lawful vacation policy.
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