California wage and hour law differs from laws in other states in a number of respects. The law regarding vacation is one such example. The California Court of Appeal in Church v. Jamison recently decided the statute of limitations for vacation claims in a way that increases employers’ potential liability. Employers therefore should review California’s rules regarding this highly prized employee benefit.

Employees May Claim Unpaid Vacation No Matter How Long They Have Accrued It

John Church went to work for Wilcox, Hokokian & Jackson, an accounting firm in Fresno. Church earned vacation at the rate of 10 days per year. By May 2000, he had earned 10 days’ vacation and had not taken any of it.

When Church’s employment ended in May 2001, he was not paid his unused vacation. Church retained a lawyer to file suit over a business dispute. However, he did not allege a vacation claim until April 2002. Church’s claims were dismissed by a superior court judge, who relied on case law and the Division of Labor Standards Enforcement’s (“DLSE”) opinion that the statute of limitations bars claims for vacation accruing during employment earlier than two years or four years, depending on whether the vacation accrual is based on a written or oral contract.

Church then sued his first lawyer for malpractice. A superior court judge dismissed the malpractice claim and Church appealed. The Court of Appeal was asked to decide whether the malpractice claims had merit.

The Court of Appeal refused to decide whether vacation pay was subject to a two, three or four-year limitations period. The DLSE takes the position that a claim for vacation may be filed within two years of separation if the vacation was promised verbally, or within four years if pursuant to a written contract. Because Church filed his lawsuit within one year of his termination, the vacation claim was timely under any of the above periods.

The court then addressed whether the vacation claim could be used to recover vacation earned in 1999 but unused through Church’s termination date. The court decided that the right to vacation pay does not accrue until termination of employment under Labor Code section 227.3. There was no basis for holding that an employee’s failure to take vacation reduced the liability. Rather, the court reasoned, all unused vacation remained available to employees as of the termination date.

The court in Church disagreed with a prior decision of the Court of Appeal in Sequeira v. Rincon-Vitova Insectaries, Inc. (1995) 32 Cal.App.4th 632. Relying on DLSE opinion letters, the court in Sequeira had held that employees’ vacation claims were limited to the vacation earned during the final two or four years of employment. The court in Church found the DLSE’s rationale to be unpersuasive and refused to apply it.

There is now a conflict between the courts of appeal. Unless the California Supreme Court accepts review of the Church decision, the superior courts may choose to apply the statute of limitations based on either Church or Sequeira.

Overview of California Law Regarding Vacation

In Sequeira, the plaintiff employee was employed for 12 years. Under the Court of Appeal’s decision in that case, the employee could not recover accrued, unused vacation pre-dating four years from his termination. Under Church, that “look back” provision would not have applied, and the employee could have sought vacation pay accruing from the inception of employment. Courts’ application of the rule in Church may result in additional potential liabilities. Employers therefore may wish to minimize the potential effect of the Church decision.

Employers need not grant any vacation or paid time off. However, most employers do provide some kind of vacation benefit, if not to provide employees with needed relaxation, then to remain competitive for qualified employees.

When employers do provide paid vacation, Labor Code section 227.3 comes into play. That statute provides:

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.

The California Supreme Court in Suastez v. Plastic Dress-Up, Inc. decided long ago that “use it or lose it” vacation policies violate section 227.3. Under those policies, common in many other states, vacation must be used during a time period prescribed by the employer’s policy or it is lost.

Illegal Vacation Policies

Employers have attempted to implement a variety of vacation provisions that restrict employees’ rights under section 227.3. But the DLSE and employees have invoked section 227.3 to invalidate them as forfeitures. Provisions held illegal include:

• forfeiture of vacation when employees do not provide adequate notice of separation;
• forfeiture of vacation when employees are fired for misconduct;
• provisions granting vacation in a lump sum at the end of a period of time that may be used in advance;
• policies allowing vacation to accrue at an accelerated rate during part of the year.

In addition, the DLSE has held that other time off that may be taken without condition is the equivalent of vacation and, therefore, subject to section 227.3’s prohibitions on forfeiture. Therefore, “PTO” plans, permitting paid time off for any purpose, are treated as vacation. “Personal days,” and “floating holidays” too, cannot be forfeited and must be paid at the time of separation if not used. On the other hand, sick days, holidays, and even paid days off for birthdays or anniversaries, are not considered “vested” because they require occurrence of some event. These paid days off are not required to be paid out at the time of separation of employment.

Lawful Limitations on Vacation

How can employers limit accrual of vacation to avoid significant liabilities when employees separate? One way is to manage employees’ vacation such that employees are scheduled to take the time off they have accrued.

For employers who do not wish to mandate vacation time, the “accrual cap” provides an alternative. The California courts have decided that employers may permit vacation to accrue up to a pre-designated ceiling or “cap,” after which point no vacation accrues until the employee uses sufficient vacation.

Even the cap, however, may be held an illegal forfeiture if it is determined to be a “subterfuge” to avoid section 227.3. For example, if an employer refuses to permit employees to take vacation, the cap may not be allowed because the employee cannot comply with the cap. Or, the employer’s cap may be so low that it is impossible for the employee to take sufficient vacation to stay below the cap.

Several years ago, the DLSE took the position that employers must give employees up to nine months to take accrued vacation. As a result, employment lawyers warned employers to ensure caps permitted accrual of at least one year and nine months’ vacation. The DLSE’s opinion letter on this subject has been withdrawn. However, the DLSE is required to construe vacation policies under “principles of equity and fairness.”

Therefore, employers should allow sufficient accrual to permit employees to take vacation without reaching the cap too quickly. How much is that? Only your Deputy Labor Commissioner knows for sure. But the DLSE will take into consideration the cap itself, the amount of vacation the employee accrues, and the extent to which the employer restricts employees from taking earned vacation.