Update Applicable to:

All California employers and multi-state businesses with at least 1 employee in California.

What happened?

A reminder that California has a prohibition regarding Use-it-or-lose-it policies regarding vacation.

What do employers need to do?

Employers should review the resources provided and consult with their trusted employment attorney on how to implement a policy or practice that will benefit them.

What are the details?

In California, paid vacation is a form of wages, and it is earned as labor is performed; there is no legal requirement for an employer to provide its employees with either paid or unpaid vacation time. “However, if an employer does have an established policy, practice or agreement to provide paid vacation, then certain restrictions are placed on the employer as to how it fulfills its obligation to provide vacation pay.” SHRM. After vacation leave is earned, it cannot be taken away from the employee, and can use accrued vacation time as soon as it is earned, and employers must not impose unreasonable restrictions on its usage.

Given that vacation time is considered a form of wages, employers are required to pay employees for any unused accrued vacation time upon termination or separation of employment (unless stipulated in a Collective Bargain agreement – CBA-); An employer may place a reasonable cap on vacation benefits to prevent an employee from earning vacation in excess of a certain number of hours.

California law prohibits “use it or lose it vacation” policies where employees forfeit accrued vacation time that is not used by a certain date. This does not mean in any case that vacation time, if unused, must accrue indefinitely (that is why employers can cap it).

The DLSE provided guidance as to what it considers to be a reasonable cap, or as 15.1.4.1.:

“…vacation policies which provide that all vacation must be taken in the year it is earned (or in a very limited period following the accrual period) are unfair and will not be enforced by the Division.”

For more information, please see the links below:

Law Firm Articles: Article 1, Article 2

DIL FAQ

DIR Guide (DLSE Guide)

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