As an employer in California, what are my options in how I manage my employee’s vacation days?
First off, in California there is no legal requirement to provide paid or unpaid vacation time. But most companies do in order to recruit and retain employees. (Please note: While employers don’t have to offer vacation or PTO plans, they must comply with a number of paid leave related laws in California and various instrumentalities. This article solely addresses vacation policies.)
If you do chose to offer such a policy as the employer, earned vacation time is then considered wages and it is earned by employees as they work. In other words, vacation pay is considered a form of wages, which is given as it is earned. Please note, this also applies to Paid Time Off (PTO) earned days.
So in short, if your employee is not using vacation days, you could A) pay them off each year or B) set a cap in order to incentivize the employee to spend them. However, as the employer you CANNOT put in a “use it or lose it” policy.
A “use it or lose it” policy is when a company installs a forfeiture of vacation pay when it is not taken by a certain date, which is an illegal policy in California.
As opposed to a “use it or lose it” policy, a vacation policy that puts a “cap” or “ceiling” on the amount of vacation pay an employee can accrue is allowed. An illegal “use it or lose it” policy leads to a loss of accrued vacation pay for the employee. Meanwhile a “cap” puts a limit on how many vacation days can build up. That is to say, as soon as a set number of accrued vacation days is earned but not used, no additional vacation days accrue until the amount lowers back down below the set cap.
For example, if you set the cap at four weeks, or 160 hours, that an employee can accrue, then they will not be able to start accruing more vacation time until they have used some of their vacation hours and their hours fall below the maximum.
Even though “cap” policies are allowed, the employee must be able to take a vacation within a reasonable time frame. If a “cap” policy actually serves as a means to deny employees vacation pay or benefits, the policy would not be permissible in California. For example, a work policy of vacation days having to be taken in the year that it is earned or in a very constrained time period following when the vacation days were accrued is deemed unfair.
The employer can decide vacation pay responsibilities, such as managing when the employee can take a vacation and how long of a vacation they may take at a time. The employer can also pay the employee off at the end of the year for vacation that the employee earned and accrued that year, but ultimately did not take.
In California, you cannot institute a “use or lose it” policy in which the employee has to use the vacation within a narrow timeframe or the same year or face loss of vacation days. You also must pay terminated employees their unused vacation days.
Employers can institute policies of cap/ceiling where there is a limit to the amount of vacation days they can accrue and must fall below that cap to get more; pay off unused vacation days for ones not used that year; and decide when and the amount of vacation days at a certain time.
Disclaimer: Any compliance related information in this blog is intended to be informational and does not constitute legal advice regarding any specific situation. Should you require further compliance assistance or legal advice, please consult a licensed attorney.
For more information, please visit the California Department of Industrial Relations.
By W. Bland