Question: I currently have a policy that provides employees with vacation up to a certain maximum amount of days. Do I have to give the employees written notice that they are nearing that maximum?


Answer: Neither California nor federal law requires employers to offer employees vacation. However, if they do, there are certain rules that apply.
Employers that offer vacation to their employees typically have policies that allow them to earn vacation throughout the calendar year according to the employee’s length of service. You reference that you provide vacation up to a certain maximum amount. Your policy is in keeping with California law which allows employers to “cap” accrued vacation at a maximum, but does not allow “use it or lose it” vacation policies that require employees to forfeit any accrued but unused vacation time at the end of the year. The reason is that under California law, earned vacation is treated as wages, and wages cannot be taken away from an employee once they are earned.
Employers are allowed to “cap” an employee’s vacation accrual at a “reasonable,” predetermined amount that is usually 1½ to 2 times the vacation benefits that the employee will accrue in one year. Once the cap is reached, additional vacation time stops accruing until the employee uses some of that accrued vacation time and reduces it below the cap. An employer is not required to give employees written notice that they are reaching that cap unless they have a policy that requires them to do so, or are subject to a collective bargaining agreement that requires that they give such notice. Nevertheless, an employer must keep records of its employees’ vacation accrual, and when vacation is paid out, the payment of vacation must be reflected on the employee’s wage statement. When an employee is terminated, regardless of the reason for it, all accrued vacation must be paid to the employee in his or her final paycheck at the employee’s pay rate at the time of termination, and the paycheck stub must have a line item showing the vacation hours accrued and the amount paid.
Most employers that provide their employees with vacation also provide them with sick days. In contrast with vacation days, an employer can have a “use it or lose it” policy for sick days, and there is no requirement that the employer pay the employee for accrued but unused sick days at the time of termination.
Some employers choose to implement a paid time off (or “PTO”) plan for their employees providing a certain number of days each year, usually based on length of service, that may be used for vacation, sick time, or personal days. Employers that use PTO plans must keep in mind that since PTO may be used to take time off for any reason, the Labor Commissioner views all PTO days as vacation under the law. This means that, at termination, an employee is entitled to be paid for all accrued but unused PTO days, even though the PTO is meant to be used for vacation or sick days.
Although employers have a great deal of discretion in deciding whether they want to offer vacation, sick days, or PTO, once they decide to do so, they must follow all of the laws and policies that apply.