Seyfarth Synopsis: While California courts have created annoying doctrines with respect to vacation pay, it remains the case that vacation pay is a matter of contract and that employers can avoid many problems with careful drafting of the vacation plan.
As we anticipate Labor Day weekend, note this mid-summer treat from the California Court of Appeal: its decision in Minnick v. Automotive Creations that when an employer’s vacation policy explicitly provides that employees don’t earn vacation until after their first year of employment, the policy is interpreted just like it was written, so that an employee who separated during his first year is not owed any vacation pay upon termination.
Is this holding really new? No and yes. Not new, of course, is the rule that California employers, absent a contract, need not provide any paid vacation at all. But employers that do provide paid vacation must comply with their policies and honor the principle, established by the California Supreme Court’s 1982 opinion in Suastez v. Plastic Dress-Up Co., that vacation pay, once “vested,” cannot be forfeited and must be paid (to the extent unused) when employment terminates (Lab. Code §227.3).
Also not new is the point that an employer may, by policy, impose a waiting period at the beginning of employment before vacation benefits begin to accrue. This kind of provision has been honored by the DLSE and by courts, so long as the employer implements the period consistently; that is, employers that want to avoid the accrual of paid vacation from the start of employment cannot then award vacation pay retroactively upon completion of some period of employment, but rather must provide that vacation pay does not begin to accrue at all until the waiting period is over.
What is new, and welcome, about Minnick is its definitive statement that employer policies can define how and when vacation has been “earned,” and can provide for advances of vacation pay not yet earned. For context, we harken back to Suastez, which interpreted Labor Code section 227.3 to mean that vacation pay is vested as it is “earned,” and that vested vacation pay cannot be forfeited. The vacation policy in Suastez simply provided: “One week—First Year; Two weeks—Second Year; Three weeks—Fifth Year.” The Supreme Court interpreted this language to mean that vacation pay started to accrue on day one, and was earned on a daily basis as the employee worked. Therefore, the employer violated the law when it failed to pay a pro rata share of the vacation pay earned during the year before the employee terminated, even though he had not completed the full year.
The spectre of Suastez haunts California employers when structuring vacation programs, as they strive to (a) avoid the negative of incurring potential liabilities to short-timers (in the form of accrued but unused vacation benefits) while (b) achieving the positive of offering paid vacation as soon as possible. The Court of Appeal provided additional guidance on this dilemma in its 2009 decision in Owen v. Macy’s, which recognized that an employer can lawfully fix the date on which vacation pay begins to accrue; in Owen, the employer imposed a waiting period of six months before vacation pay began to accrue. And, of course, it is common to have 90-day waiting periods for vacation accrual.
No case prior to Minnick had validated a one-year waiting period before accruals begin. Minnick notes that Suastez does not require vesting of vacation pay on day one of employment, and reasons that Suastez does not prohibit an employer from imposing a waiting period (of apparently any length):
[A]n employer may lawfully decide it will not provide paid vacation. By logical extension, an employer can properly decide it will provide paid vacation after a specified waiting period. This is similar to an employer’s authority to limit the amount of vacation pay that may be earned. If employers can lawfully restrict accrual at the back end [a la the often utilized “accrual cap” concept], it follows that employers can lawfully impose a waiting period at the front end.
Meanwhile, employers can address the desire to provide paid vacations as soon as possible by advancing unearned vacation pay (as the employer did in Minnick). (Whether unearned vacation pay could ever be recovered upon termination of employment is an issue that Minnick does not address).
The Minnick decision will be welcome news to employers who wish to impose a longer waiting period before vacation accruals start. And much of we’ve said about vacation applies equally to “paid time off” programs as well. A couple of caveats, though:
- Drafting clear limitations on vacation accruals is crucial.
- As to plans that use PTO to satisfy obligations to provide mandatory paid sick time under California (or local municipal) law, note that most paid sick time laws provide for accruals to begin upon employment, so imposing a waiting time for that benefit would get you in trouble.
For more information on this or any other pressing employment Cal-peculiarity, please reach out to your favorite Seyfarth attorney.