Why it matters

A California employer dodged a putative class action alleging violations of the state’s Labor Code based on the failure to provide proper wage statements in a new opinion from the appellate court. Lidia Soto claimed that Motel 6 neglected to state accrued vacation and paid time off wages on the wage statements of its employees. A trial court judge tossed the suit and a state appellate panel affirmed. California law mandates that employers provide itemized statements of wages to their workers semimonthly or at the time they are paid, with certain information that must be included. But the value of earned vacation pay and paid time off is not on that list, the court concluded. “Soto’s argument reflects a misunderstanding of the nature of an accrued vacation benefit under California law,” the panel wrote. “[A]lthough vacation time vests as labor is provided, unused vacation time does not become a quantifiable vacation wage until the employee separates from the employment.” The decision saves employers from what could have been a complicated—and costly—addition to employee wage statements.

Detailed discussion

Lidia Soto worked for Motel 6 from June 2012 through January 2015. A few months later, she filed suit against her former employer in her individual capacity and on behalf of all aggrieved workers under the Private Attorneys General Act (PAGA), alleging that Motel 6 violated Labor Code section 226(a)(1) by failing to include the monetary amount of accrued vacation pay in its employees’ wage statements.

The employer demurred, arguing that the Labor Code does not require employers to itemize the monetary value of vacation balances before the employment relationship is terminated.

Emphasizing the legal principle that vacation benefits are earned and become vested during the pay period when they accrue, Soto told the court that Section 226(a) requires itemization of earned “wages” and that California courts have recognized that a “wage” includes vacation pay.

A trial court disagreed, dismissing the suit, and Soto appealed. An appellate panel affirmed, turning first to the Labor Code itself.

Section 226 mandates that employers provide accurate, itemized statements of wages to their employees, with a list of specific information that must be included on the wage statement. That list does not include paid time off or vacation pay, the court noted.

“[S]ection 226(a) is highly detailed, containing nine separate categories that must be included on wage statements, and the code section does not identify accrued paid vacation as one of these categories,” the court said. “When a statute omits a particular category from a more generalized list, a court can reasonably infer a specific legislative intent not to include that category within the statute’s mandate.”

Soto countered that vacation pay did not need to be specifically identified because it falls within the definition of the “gross wages earned” and “net wages earned” categories the statute does require. But the panel found this argument unavailing.

“Soto’s argument reflects a misunderstanding of the nature of an accrued vacation benefit under California law,” the court wrote, citing a California Supreme Court decision holding that paid vacation is a form of deferred wages for services rendered, similar to a pension or retirement benefit. “Under this view, a proportionate right to a paid vacation vests as the labor is provided.”

Consistent with this position, “the courts have recognized that although vacation time vests as labor is provided, unused vacation time does not become a quantifiable vacation wage until the employee separates from the employment,” the panel said.

“Under these authorities, vacation pay cannot be fairly defined as ‘gross wages earned’ or ‘net wages earned’ under Section 226(a)(1) or (a)(5) until the termination of the employment relationship,” the court said. “The employee has vested rights to paid vacation or vacation wages during the time of his employment, but these rights do not ripen and become an entitlement to receive the monetary value of the benefit as wages until the separation date. Further, before separation, the amount of vacation pay to which the employee is entitled is not ascertainable. An employee is entitled to obtain the value of unused paid vacation at his or her ‘final rate.’ Because the amount of unused vacation and an employee’s final rate may change, an employee’s accrued vacation balance depends on the particular circumstances at the employment termination date.”

This understanding further comports with a proper reading of the statute in its entirety, which states that at the time of each payment of wages, the employer must furnish an accurate itemized statement of the earned wages. “Because unused vacation pay is not owed to an employee and is not paid to the employee until the termination of the relationship, and the monetary value of the unused vacation pay cannot be determined until the termination date, the requirement that an employer identify earned ‘wages’ logically does not extend to accrued vacation benefits,” the court said.

The statutory purpose also supports this conclusion, the appellate panel added, as Section 226 is meant to document the paid wages to ensure the employee is fully informed regarding the calculation of those wages—not a benefit that has not been paid. “Until a vacation benefit is required to be paid, it need not be included in a wage statement under section 226(a),” the court concluded.

Even Soto’s plea to construe the wage statute broadly in favor of employees did not sway the court. “We agree, but this principle does not provide us with the authority to rewrite applicable legislation to ‘conform to [an] appellant’s view of what [the law] should be,’ ” the panel wrote. “Whether disclosure regarding unused paid vacation information should be required on a regular basis is a policy matter for the Legislature and/or the regulatory agencies, and not the courts.”

To read the decision in Soto v. Motel 6 Operating, L.P., click here.