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The Law on Vacation Pay, Sick Pay, Holiday Pay and Sabbaticals in California

Paid vacations are not mandatory in California, whether under state or federal law. So, most of the time, an employee is not going to be able to recover pay for vacations, even if that seems like the fairest thing to do. One exception is if an employment contract between the employee and employer provides for a paid vacation, then not providing that vacation could constitute a breach of that employment contract. Another exception is where an employer offers paid vacations. Under Labor Code §§ 201 & 202, an employer must pay an employee all wages earned and unpaid at the time, or soon after, employment terminates [§§201(a), 202(a)]. Although an employer is not required to offer paid vacations, if the employer does offer vacation, §227.3 provides that if an employee is terminated without having taken his vested vacation time, “all vested vacation shall be paid to him as wages at his final rate” and the employer‟s policy “shall not provide for forfeiture of vested vacation time upon termination” [Paton et al. v. Advanced Micro Devices, Inc. (2011), 2nd California Appellate District]. An employee whose compensation package includes a 2-week paid vacation in a particular year is earning the monetary equivalent of 52 weeks of pay for a 50-week work year” [Henry v. Amrol, Inc. (1990) 222 Cal. App. 3d Supp. 1, 5]. Under certain other conditions, an employee could be legally entitled to a paid vacation if his or her employer has a policy [i.e., policy manual and practice] of paid vacations and fails to follow that policy, especially if that policy is not equally applied. For instance, if the vacation policy is followed as to a certain class of persons, but not as to others, the policy or practice could be discriminatory, and thus, unlawful. Usually, that would manifest itself as a class of people not getting vacations as a result of their age (over 40 years old), race, gender, national origin, sexual preference, disability, and so on. Where an employer does provide paid vacations or vacation pay, there are some legal restrictions regulating vacation pay.

First, it is unlawful for an employer to have a policy where unused vacation is lost. Why? Because the law deems vacation pay, like wages, to be earned daily. And earned compensation cannot legally be taken from an employee, whether because the vacation time was not taken in the employment year in which it is earned, or because it was not taken before the last day of the employment. Thus, the employer will be legally required either to permit the employee to actually take all earned vacation days, or otherwise to pay the employee for those earned days, usually when the employer-employee relationship ends (and within at least 72 hours of the end of that employment relationship). The best practice, for the employer to avoid legal liability for vacation pay, is for the employer to pay the employee all earned vacation pay on the last day of the employment.

Second, there is technically no statute of limitations on earned vacation pay. Theoretically, if an employee has earned but not taken vacation or has earned but has not been compensated for vacation pay, even for a period lasting, for example, over ten years, all of that earned pay is still due to be paid to the employee at the end of the employment relationship.

Third, California law enforces a strict policy that no offsets (i.e., money owed by the employee to the employer as a result of perhaps a loan, advances, or even because the employee was paid more vacation pay than he or she actually earned) can be deducted from an employee’s paycheck, especially the final paycheck. An employer could argue, and usually not successfully, that the employee authorized the payback of overpaid vacation pay before taking the vacation. Or the employer could argue that the employee, at the time of the last pay period, expressly authorized the deduction. Yet, due to unequal bargaining power, and because cases hold that an employee may not waive various Labor Code protections, an employee would likely be viewed as having been coerced into such an agreement, in which case the agreement would not be enforced.

Fourth, all unearned vacation pay will have to be paid at the last hourly rate the employee earned [Labor Code §227.3]. If the employee was paid by the hour, that is the rate the employee will be paid, regardless of the fact that some portion of the vacation pay was earned at a time when the hourly wage was much lower than the rate on the last day of employment. Where the employee was paid a salary, Labor Code §515 dictates a formula for calculating the last hourly rate (i.e., dividing the yearly salary by 52 weeks and then dividing it by 40 hours per week).

Fifth, many employers do have a perfectly valid policy excepting probationary workers (i.e., those in the first 30-90 days of employment) from earned vacation pay. Neither §227.3 nor Suastez prohibit an employer from imposing a waiting period before new employees may begin earning vacation [Owen v. Macy’s, Inc. (2009) 175 Cal. App.4th 462, 471]. But once the probationary period is over, the employer cannot treat the employee any differently than the other employees are treated.

In addition, vacation policies that provide that employees are entitled to an annual paid vacation but that an employee does not become eligible for the vacation until the employee’s anniversary date are invalid, as is any argument based on such a policy that where an employee is terminated prior to his anniversary date, he vests no vacation pay, because [Suastez v. Plastic Dress-Up Co. (1982) 31 Cal. 3d 774, 779-782]: “The consideration for an annual vacation is the employee’s year-long labor. Only the time of receiving these “wages” is postponed.” [p. 779]. Vacation pay, if it is offered, is a type of deferred compensation, which vests pro rata as the employee renders the services for which he was employed [p. 781]. [O]nce it is acknowledged that vacation pay is not an inducement for future services, but is compensation for past services, the justification for demanding that employees remain for the entire year disappears. If some share of vacation pay is earned daily, it would be both inconsistent and inequitable to hold that employment on an arbitrary date is a condition precedent to the vesting of the right to such pay” [p. 782]. The requirement that the employee remain until his anniversary date was, in effect, a condition subsequent that purported to extinguish a right already earned. Such a provision is void under §227.3.” [p. 782].

Sixth, many employers do have a perfectly valid policy capping an employee’s earning or accrual of paid vacation when the employee hits a cap, such as 1.5 times the yearly accrued vacation time, so long as the cap policy is applied equally to all employees and so long as the cap policy is carried out in a fair manner. It would not be fair, for instance, for an employer to actively prevent an employee from taking vacation but then dock that employee by applying a cap on that basis.

Seventh, vacation and holiday pay are different issues. Vacation is different from paid time off that is conditioned upon the occurrence of a specific event or granted for a particular purpose. For example, some employers give paid time off for state or federal holidays. The right to this type of time off does not vest with day-to-day employment; it vests upon the occurrence of the holiday [Paton et al. v. Advanced Micro Devices, Inc. (2011), 2nd California Appellate District; see, 1 Advising Cal. Employers and Employees (Continuing Education Bar 2011) “Vacations, Family and Medical Leave, and Other Time Off” §§ 6.9-6.12, pp. 534-538; see (as of Jul. 26, 2011)].

Eighth, sick pay is not treated, at law, the same way as vacation pay is, and thus, unused sick pay need not be paid to the employee. The exception is if the employer treats sick pay the same as vacation pay, then, arguably, the vacation pay rules apply to the sick pay as well. Again, sick leave is not mandated by California law. Rather, some employers offer paid time off for illness, bereavement, or other specific reasons. An employee’s right to this type of leave vests when the reason for the leave arises, as when the employee falls ill or a family member dies, as contrasted to vacation time, which time off an employee may use for any purpose [Paton et al. v. Advanced Micro Devices, Inc. (2011), 2nd California Appellate District; see, 1 Advising Cal. Employers and Employees (Continuing Education Bar 2011) “Vacations, Family and Medical Leave, and Other Time Off” §§ 6.9-6.12, pp. 534-538; see (as of Jul. 26, 2011)]. However, sick leave may be impacted by the Family Medical Leave Act and certain employee notices under the FMLA may require the employer to provide time off.

Ninth, sabbatical programs which offer a true sabbatical and not a disguised vacation, are not subject to Labor Code §227.3.

Paid leave programs called sabbaticals used by businesses in the private sector are typically shorter and more frequent than traditional academic sabbaticals and many do not require the employee to have any particular purpose or to account for how his or her time is spent while on leave. The leave is given for employees to simply “recharge their batteries” [Paton et al. v. Advanced Micro Devices, Inc. (2011), 2nd California Appellate District; see, Schwartz, The Corporate Sabbatical (Nov. 15, 1999) CNN Money (as of Jul. 26, 2011)]. Because employees may use vacations for the same purpose, such nonacademic sabbaticals prompted the Labor Commissioner to devise sabbatical “test” criteria.

The California Department of Labor Standards and Enforcement (DLSE) would find a sabbatical program to be exempt from Suastez if, “the sabbatical leave is substantially longer than the normal vacation period and is not in lieu of vacation[ and, where … the sabbatical … [is] granted only after a substantial period of employment … [E]ach case will have to be decided on its own facts[, but [g]enerally speaking, [the DLSE] will not consider a traditional sabbatical arrangement (i.e., 4 months off after 7 years), to require proration” [see, DLSE Opinion Letter (as of Jul. 26, 2011)].

The second DLSE Opinion letter set out a DLSE “test” of sorts:
“[I]n order for a sabbatical not to be subject to [§]227.3 and Suastez … (1) The sabbatical must be for an extended period of time beyond what is normally granted for vacation; (2) It cannot replace or displace the vacation normally earned each year but must be in addition to a regular vacation program; (3) Sabbatical leave may only be provided to high level managers and professionals in advanced fields; [and] (4) … sabbatical leave should be granted infrequently, such as every 7 years, though in certain circumstances a shorter period may be acceptable”

[DLSE Opinion Letter (as of Jul. 26, 2011)].

The third DSLE Opinion Letter stated that sabbatical programs “available across the board to all employees” would be considered vacation. [DLSE Opn. Letter (as of Jul. 26, 2011)].

Legitimate sabbaticals are evidenced by facts that the leave is designed as an incentive for continued and improved performance by the most experienced employees and not merely as a reward for a prior period of service.

At least one federal district court accepted the DLSE test as setting forth the factors relevant to deciding whether a six-week sabbatical was actually regular vacation [Drumm v. Morningstar, Inc., 2009 U.S. Dist. LEXIS 108709 (N.D. Cal. Nov. 5, 2009)]. Juries, not courts, will decide if these criteria have been met [Drumm v. Morningstar, Inc., supra, at p. 16].

The Court in Paton et al. v. Advanced Micro Devices, Inc. (2011), 2nd California Appellate District, though recognizing that although neither a federal case nor the DSLE test is binding on the Court, decided to adopt the DSLE test, with one added criteria. Thus, the Paton Court has held that the four criteria are as follows:

  1. Leave that is granted infrequently supports assertions that the leave is intended to retain experienced employees who have devoted a significant period of service to the employer; and every seven years is the traditional frequency and it seems an appropriate starting point for assessing corporate sabbaticals as well. Greater or lesser frequency could be appropriate depending upon the industry or particular company involved. However, Paton declined to hold that, as to the nature of the employee to whom the sabbatical is offered, employers must limit sabbaticals to upper management or professional employees, or to hold that offering sabbaticals must be precluded as to all employees, or as to all employees in a class.

  2. The length of the leave should be adequate to achieve the employer’s purpose, which is basically “reenergizing the employee”, such that the length of the leave should be longer than that “normally” offered as vacation.

  3. A legitimate sabbatical will always be granted in addition to regular vacation, especially where the regular vacation program is comparable in length to that offered by other employers in the relevant market, because otherwise an employer could offer a minimal vacation plan and reward senior staff with sabbaticals as a way to avoid the financial liability of a more generous vacation plan.

  4. The added criteria is that, since a sabbatical is designed to retain valued employees, then a legitimate sabbatical program should incorporate some feature that demonstrates that the employee taking the sabbatical is expected to return to work for the employer after the leave is over.