WORKPLACE LAW – Vacation Time Basics

Question: My company does not provide paid vacation to employees, but we are considering offering it to improve employee morale and retention. Are there any rules I need to know?

Answer: Although not required by law, many employers offer their employees vacation benefits to allow them time for rest and relaxation. In California, if an employer chooses to offer vacation benefits, there are certain requirements with which it must comply.

Many states allow employers to have “use it or lose it” policies that provide that if an employee does not use his or her vacation benefits by a certain date, the employee loses them. California does not allow “use it or lose it” vacation policies. Under California law, vacation benefits are considered to be deferred wages for services rendered. That means that once vacation benefits are earned, like wages, they cannot be taken away. When an employee quits or is discharged, the employer must pay out all vacation benefits that the employee has accrued but has not used at the employee’s pay rate at time of separation. For that reason it is extremely important that an employer maintain records of accrued and used vacation for each employee eligible for the benefit.

According to the Bureau of Labor Statistics, roughly 73% of employees working in non-government jobs receive paid vacation, although less than half take all of their eligible time off. If an employer cannot take away an employee’s unused vacation, but must instead pay it out at the time of separation, what can be done to prevent an employee from accruing vacation benefits for years resulting in a potentially large payment to the employee at the time of termination? California law addresses this issue by allowing an employer to cap an employee’s benefits at 1.5 or 2 times the employee’s annual accrual of benefits. For example, if an employee can earn up to 40 hours of vacation per year and the employer imposes a cap of 1.5 times the employee’s annual accrual of vacation benefits, the employee can accrue up to 60 hours of vacation. Once the vacation accrual hits that cap, vacation stops accruing until the employee uses some of the vacation hours.

An employer that provides vacation benefits should have a written policy that clearly sets forth specifics like eligibility requirements, the accrual rate, when an employee can start using accrued benefits, the cap on benefits, and the employer’s policy on the amount of notice an employee must give if he or she wants to take vacation. Under California law, an employer has discretion in the vacation benefits it offers. For example, an employer can choose to provide vacation benefits to all employees, to regular full- and part-time employees, or only to regular full-time employees. It can increase the accrual rate depending on the years of service, or never increase the accrual rate. It can require an employee to work a certain amount of time before the employee can use vacation benefits, or it can allow employees to use vacation benefits immediately upon accrual, or even before they are accrued. Having these specifics in writing is critical to avoiding any misunderstanding or claim.

Knowing California law on vacation benefits and preparing a detailed written vacation policy that complies with that law allows an employer to provide an appreciated benefit while minimizing liability.