Can my employer have a use it or lose it policy toward vacation time that has already accrued under CA Labor Code 227.3?

I have worked for the past nine years for a company in California. At the end of 2005, they sent a memo around that stated that from then on, we could only carry forward a week of our vacation. At the end of 2006, I had over two weeks coming. I was actually unable to take vacation because the situation in my department was such that my desk would not be covered if I did so. What are my rights?

By Deskin Law Firm
If vacation pay is provided as an employee benefit, earned but unused pay cannot be forfeited. But your employer can cap the amount of vacation pay that you earned. When an employer does provide for paid vacation time, this time constitutes earned wages. (Labor Code Section 227.3) The California Supreme Court has said that vacation pay is not considered a gift or gratuity, but as additional wages for services performed. There are two very important provisions to section 227.3:
1. the employees must be paid as wages their earned but unused vacation time when they leave employment.
2. earned vacation time cannot be forfeited. An employee cannot forfeit earned but unpaid wages, and this principal applies to vacation pay.

Vacation time is earned proportionately as labor is rendered. Upon termination, an employee is entitled to a pro rata share of vested vacation pay. Vacation pay is not considered to be an inducement for future services, but is instead compensation of past services. In Suastez v. Plastic Dress-Up Co. (1982) 31 Cal.3d 774, 782., the employer had a policy that one week of vacation time was earned after one year of employment. The Supreme Court held that the vacation time did not "vest" after one year, but instead "vests" on a pro-rata basis as it is earned. Thus, after six months, an employee would have earned one-half week of vacation notwithstanding the company policy. This also means that if an employee is terminated mid-year, they are entitled to their accrued vacation pay up until the time of termination.

An employer will often want to limit the amount of vacation time an employee can earn. Because earned vacation time is considered wages, it is unlawful to have a use it or lose it policy. Earned wages cannot be forfeited by an employee. Likewise, earned vacation time cannot be waived by an employee for failing to use it. Even if an employee knows the employer has a use it or lose it policy and voluntarily refrains from taking vacation, the employee does not waive their right to be paid for accrued but unused vacation.

A limit to earned vacation time, however, can be obtained by using a no additional accrual policy. The rule is that unused vacation will automatically accrue unless limited by a lawful company policy. A "use it or lose it" policy is illegal in California, whereas a “no additional accrual” policy is legal.

An employer has the right to control when vacation time is taken, and how much can be taken at one time. An employer can thus prevent all of its employees from taking vacation leave at the same time, and limit how much vacation may be taken at a time, in the event an employee has accrued several months of vacation time.

Vacation pay is paid at the employee's current (or final) rate of pay, and not their rate of pay when the vacation time accrued. (Labor Code Section 227.3) This is so even though vacation pay is considered a form of deferred compensation. Assume an employee earns 10 days of vacation time while earning $10 per hour. The employee then earns another 10 days of vacation while earning $15 per hour. The employee then leaves employment. The employer is obligated to pay the employee 20 days of vacation time at a $15 per hour rate.

Of course, an employer cannot reduce an employee's rate of pay shortly before terminating them as a tactic to reduce the amount of earned vacation to be paid. Indeed, an employer can never reduce the amount payable for accrued vacation time by demoting an employee or reducing their wages, even for an admittedly proper purpose, because to do so would cause a forfeiture of earned wages.

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