Vacation Pay - Revisiting Suastez

Most employers provide paid vacation for qualifying employees as a supplemental benefit. However, vacation pay policies vary widely between employers with respect to eligibility, accumulation, when available to be used, etc. Section 227.3 of the California Labor Code addresses vested vacation time as follows:

"Unless otherwise provided by a collective-bargaining agreement, whenever
a contract of employment or employer policy provides for paid vacations,
and an employee is terminated without having taken off his vested vacation
time, all vested vacation shall be paid to him as wages at his final rate in
accordance with such contract of employment or employer policy respecting
eligibility or time served; provided, however, that an employment contract
or employer policy shall not provide for forfeiture of vested vacation time
upon termination.

The Labor Commissioner or a designated representative,
in the resolution of any dispute with regard to vested vacation time, shall
apply the principles of equity and fairness."

Employer policies normally provide for vesting of vacation credits after an employee has worked for a required period of time. The vacation vesting provision of the Labor Code reads in pertinent part: ". . . an employment contract or employer policy shall not provide for forfeiture of vested vacation time upon termination."1 Even though the California Supreme Court addressed the issue of vesting more than 20 years ago, the interpretation and application of the Labor Code provision is sometimes confounding for employers even today.2

The following questions and answers are intended to provide assistance to employers concerning vacation vesting, accumulation, and pay off policies.

Question: My employer's vacation policy provides a right to a paid vacation. When do my vacation rights vest?

Answer: Your right to a paid vacation vests proportionately as your labor is rendered. For example, if your employer provides one day of vacation monthly, after three months of employment you would have three days of vacation accumulated.3

Question: My employer's vacation policy provides that one day of paid vacation is earned monthly. I am entitled to take paid vacation time after one year of employment. If I quit my job prior to completing one year, am I entitled to be paid for accumulated vacation for my period of employment?

Answer: Yes. Your right to paid vacation is proportionate to your length of employment. If you were earning one day of vacation monthly and you terminated after six months, you would be entitled to six day of vacation pay.4


Question: When an employee earns vacation time at different rates of pay (e.g. earning $20.00 an hour that increases to $25.00 an hour), may an employer pay for the vacation time when used at the rate of pay received when it was earned?

Answer: No. All vested vacation shall be paid at the employee's rate of pay when the vacation time is used.5


Question: Is an employer required to pay an employee for accumulated vacation upon termination when the employee was fired for committing a criminal act?

Answer: Yes. Vacation pay accrues as it is earned and cannot be forfeited, even upon termination of employment, regardless of the reason for termination.6


Question: Can an employer place a maximum on the number of vacation hours that can be accumulated?

Answer: Yes. An employer may place a reasonable cap on the number of vacation hours that may be accumulated. Once an employee reaches the cap, the individual is prevented from earning vacation as long as his/her vacation hours remain at the maximum that may be accumulated.7


Question: My employer combines vacation and sick leave hours and refers to them as "personal leave" that can be used for any purpose. Am I entitled to be paid for any of my personal leave upon termination?

Answer: Yes. When California Labor Code Section 227.3 was amended in 1976, the following sentence was added: "The Labor Commissioner or a designated representative, in the resolution of any dispute with regard to vested vacation time, shall apply the principles of equity and fairness"8 (emphasis added).

When an employer provides a paid time off policy giving an employee the right to use the time for any purpose, California's Division of Labor Standards Enforcement (DLSE), applying the principles of equity and fairness, takes the position that the policy be subject to the same rules as vacation policies.

Employer policies providing for "paid time off" hour accumulations are considered wages having a cash value and subject to payment upon termination.9

Question: My employer has a "use it or lose it" vacation policy. If I don't use my vacation by the end of the year, I will lose it. Is this legal?

Answer: No. Vacation hours when earned are considered the same as deferred income. The value of the vacation hours vests immediately.10


Question: My employer does not allow an employee to accrue vacation time during the first six months of employment. Is this legal?

Answer: Yes. DLSE's enforcement policy allows employers to require new employees to be employed for a specified time (up to one year) before being eligible to earn paid vacation time.

1. California Labor Code Section 227.3.
2. Suastez v. Plastic Dress-Up Co., 31 Cal.3d 774 (1982).
3. Id.
4. California Labor Code Section 227.3.
5. Id.
6. Suastez.
7. Boothby v. Atlas Mechanical, 6 Cal.App.4th 1595 (1992).
8. Stats. 1976, ch. 1041, §2, p. 4653.
9. Suastez.
10. Suastez.