With summer in full swing, many employees are taking vacations with their families. Meanwhile, Human Resources managers are checking leave balances. As the Court of Appeal recently reiterated in the case of Owen v. Macy’s, the law does not require that an employer provide its employees with any paid vacation. Any right to vacation benefits must come from the employer’s policies, an employment contract, or a collective bargaining agreement.

When employers do provide paid vacation, California Labor Code section 227.3 requires that if “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 addition, the employer policy may not require “forfeiture of vested vacation time upon termination.” The Division of Labor Standards Enforcement (“DLSE”), the state agency responsible for enforcing our wage-hour laws, can receive an employee’s complaint about being denied vacation pay. The Labor Code requires the DLSE to apply ” principles of equity and fairness.”

Paid Vacation Leave is a Form of Compensation

In the 1982 case of Suastez v. Plastic Dress Up Co. the California Supreme Court held that an employer may not refuse to pay pro-rated vacation balances if the employee leaves mid-year. The Supreme Court reasoned that “vacation pay is simply a form of deferred compensation.” The Court specifically found that vacation was not like a retention bonus, paid as an incentive for staying to the end of the year. Rather, the employee earns vacation as he works. The employer’s position that the vacation was not earned until the end of the year was equivalent to saying that a portion of the employee’s pay would be paid only if he was still employed at the end of the year.

So-called “use-it-or-lose-it” vacation policies are prohibited as well. The employee is entitled to keep paid vacation leave once it is earned. Therefore, a policy under which some or all vacation is “lost” if it is not taken by a certain date is unlawful. By analogy, an employer cannot ask an employee to pay back salary at the end of the year because she had not spent it yet.

But the Suastez court agreed that the employer may impose “conditions under which vacation pay would be paid,” such as requiring that an employee work for one year before taking a vacation, or scheduling vacation in advance. The court of appeal in Owen v. Macy’s explored the employer’s retained power over vacation benefits.

Employer May Have Rules Controlling Vacations

In Owen, a laid-off employee complained that new employees of Robinsons-May department stores (later acquired by Macy’s) did not earn any vacation leave during their first six months of employment. In addition, rather than credit vacation on a pay-period basis, Robinsons credited employees’ leave balances twice per year, one-half on May 1 and one-half on August 1. Employees received a full year of vacation by August 1, even though the “vacation year” ran from May 1 to April 30. Robinsons considered this an “advance” on vacation that an employee would earn by working during the upcoming six months. Newly-hired employees employed between six months and one year received a pro-rated amount of vacation. Owen had enough seniority to earn three weeks of vacation per year.

Macy’s closed the Robinsons-May store where Owen worked. She was unable to secure another job with the company, and was laid off on April 14, 2006 (two weeks before she would have received her next disbursement of vacation leave). As a result, and because she had used up her vacation balance, she received no payment for unused vacation leave at the time of her termination.

Owen argued that the semi-annual vacation leave policy was the same as the Suastez case, just on a six-month interval. Because Owen earned no vacation leave during her first six months, she argued that the “advance” she received for her next six months must have been earned earlier. Suastez supports Owen’s argument by saying that “right to some share of vacation pay vests . . . on acceptance of employment.” For Owen, the question came down to how much is “some.”

Vacation is Not for Everyone

Most employers expect an employee will put in some productive time before taking a vacation. At Robinsons-May, that rule was written into the vacation policy. Although Suastez dictated that vacation begins vesting immediately, the Court also noted that a typical vacation policy varies with the length of employment. For example, at that company, a first-year employee earned one week of vacation, and a second-year employee earned two weeks, fifth-years earned three weeks, and 12th-year employees four weeks. However, as discussed above, there is no minimum amount of vacation required by law. Therefore, an employer can legally start awarding vacation only after employees work a certain amount of time. Owen’s argument failed because the court found she in fact earned all the vacation to which she was entitled during the first six months of employment: none.

The Owen court had to consider whether Robinsons had promised its employees vacation benefits that were being forfeited under the accrual policy. The court found that Robinsons’ policy was clear; employees could not have reasonably believed they would earn any vacation in their first six months of employment. Indeed, Owen herself said “I don’t know how äóñ I don’t know why” when asked how she calculated the vacation benefits she was claiming in her lawsuit.

Lawful Limitations on Vacation

Vested benefits cannot be taken back, but clearly stated rules for accrual and non-accrual will be enforced. As the court in Owen made clear, employers need not grant vacation to all employees, and not in the same amounts. Therefore, it is legal to deny any vacation to employees during their first six months (or a year, or more) of service. It is also legal to set vacation earning levels based on nondiscriminatory criteria such as position and length of service.

Employers also may stop granting employees vacation pay going forward. The court in Owen based its decision in part on policies that stop employees from accruing more vacation leave when they reach a certain amount (called a “no additional accrual” policy by the court; also known as a “cap”). So, “the law does not prevent an employer from announcing a level beyond which additional vacation time after a certain level is reached. This would prevent additional vacation from vesting.”

Employers also are permitted to set the vacation pay rate as they see fit. Vacation time is not “hours worked.” Theoretically, therefore, employers may choose to pay less than minimum wage for vacation time, regardless of the employee’s pay rate for performing work. Employers should clearly communicate the vacation pay rate to avoid disputes over payment at the time of separation.

Employers also may control vacation scheduling. Management may require advance notice, and may deny vacation requests that do not comply with policies. There are a few caveats, however. First, employees taking certain types of protected leaves, such as under the federal Family and Medical Leave Act or California’s pregnancy disability leave law, must be permitted to use paid vacation for qualifying leave.

Additionally, employers that severely restrict employees from taking vacation may have trouble enforcing a maximum accrual cap. The DLSE will scrutinize the employer’s policy to ensure employees have a fair opportunity to take vacation and, therefore, avoid the cap’s effects.

Illegal Vacation Practices

Robinsons-May’s policy may not appeal to all employers. The company intentionally granted six-months’ worth of vacation all at once. It seems from the decision an employee would therefore be entitled to be paid for the entire six months’ benefit the day after the company granted it. Many employers grant vacation in smaller increments, such as hourly or monthly.

It is important to distinguish between Robinsons-May’s policy of granting no vacation to new employees and an illegal delayed grant of vacation pay. If an employer grants “no” vacation during the first six months of employment, then two weeks of vacation during the second six months, and two weeks for the entire second year, that will be considered an illegal “deceleration” of accrual.

Another issue that frequently arises is paying vacation for partial days of absence. For employees who are considered “non-exempt” from overtime, usually paid hourly, employers freely may permit or require the use of vacation time for partial-day absences. However, debiting vacation pay for an “exempt” employee’s partial-day absence can be tricky in California. Based on another court of appeal opinion, Conley v. PG&E, the DLSE takes the position that an “exempt” employee’s vacation balance may not be reduced for an exempt employee’s partial day absence of less than four hours. That is because an exempt employee is not paid for the number of hours worked in a day and, therefore, is entitled to his or her full salary even if he or she takes part of the day off.

The recession has caused employers to “furlough” employees; a euphemism for an involuntary layoff. An involuntary, full-day, absence imposed on an exempt employee does not relieve the employer from the obligation to pay the day’s salary. Therefore, it is improper to debit the vacation balance for a full-day absence mandated by the employer.

Conclusion

Owen and the discussion in this column should reassure employers that they have a number of lawful options when drafting vacation policies. However, as with many aspects of California wage and hour law, there are pitfalls as well. Because vacation is a form of wages, the Labor Code imposes severe penalties for unlawful vacation pay practices. Therefore, employers must draft clear and lawful policies, and should consult with competent employment law attorneys before attempting to implement policies that limit vacation pay.