Labor Code 227.3, as interpreted by the California Supreme Court in Suastez v. Plastic Dress-Up Co., 31 Cal. 3d 774 (1982), treats unused accrued vacation pay as earned wages that must be paid upon termination of employment. Section 227.3 does not expressly address sabbatical pay. On August 5, 2011, in a case of first impression, the California Court of Appeal in Paton v. Advanced Micro Devices, Inc. addressed the issue of what differentiates a paid sabbatical leave from a regular vacation. Citing Suastez, Paton, the named plaintiff in a class action, claimed that his former employer's sabbatical program was really just extra vacation, and that, under Labor Code section 227.3, the company could not require that he forfeit unused sabbatical pay upon his resignation.

The Sabbatical Benefit and Paton's Employment at AMD

AMD's sabbatical program initially provided that full time, salaried employees were eligible for an eight-week, fully paid sabbatical after seven years of service. The stated purpose of the program was to "encourage continued employment with AMD by providing time away from work for enrichment and revitalization." Scheduling a sabbatical was subject to numerous conditions, and the sabbatical had to be taken within two years of eligibility. Eligibility was also forfeited upon separation from the company. AMD modified the program twice?once to allow eligible employees the option of taking their sabbaticals as two separate four-week leaves, and later to shorten the length of the sabbatical to four weeks after five years of service. AMD always provided a separate paid vacation benefit for its employees.

Paton worked as a salaried employee at AMD from 1997 to 2005. When he resigned, he claimed that he was surprised to learn he would not be paid for the eight-week sabbatical he had not used.

Procedural Background

Following his resignation, Paton filed a claim under Labor Code section 227.3 for non-payment of wages with the Division of Labor Standards Enforcement ("DLSE"), which rejected the claim. He then filed a class action complaint in Santa Clara County Superior Court. The court certified a class of 1,432 former AMD employees who were eligible for the sabbatical benefit and who had not used it by the time of their terminations. AMD moved for summary adjudication, on an argument that its sabbatical benefit was not "vacation" within the meaning of Labor Code section 227.3. On that issue, the trial court granted summary judgment for AMD, finding that its program provided for a legitimate sabbatical, and not simply additional vacation, thus exempting it from section 227.3 and the dictates of the Saustez decision. Plaintiff and the class appealed.

The Court's Ruling

The fundamental question before the Court of Appeal was whether the leave is regular vacation, which the court defined as "compensation earned over the course of employment, the enjoyment of which is deferred" or a legitimate sabbatical, which the court defined as "intended to retain the most experienced or valued employees and to enhance their future service to the employer." The court noted that when a sabbatical is granted for a specific project (other than rest or relaxation), "one would have little trouble concluding that it is not vacation." The more difficult problem occurs when the sabbatical is granted based only upon the length of service, and is unconditional as to the employee's use of the time away, as was the case with AMD's program. That type of program has elements in common with regular vacation, "but could still be a legitimate sabbatical if the facts show 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."

The court concluded that it could not determine as a matter of law that AMD's sabbatical program differed from its regular vacation benefit. In the court's view, there was not enough evidence to establish what the true purpose of the program was, which was the "crucial factual question." Accordingly, it reversed and remanded the trial court's order granting AMD summary adjudication.

In doing so, the court provided some guidance. The court modified a test first set forth by the DLSE, which "employers have undoubtedly relied upon for many years." The factors set forth by the court tending to show that a sabbatical program is distinguishable from regular vacation are as follows: (1) the leave is granted infrequently, and every seven years "seems an appropriate starting point for assessing corporate sabbaticals"; (2) the length of leave should be longer than that normally offered as vacation, as a sabbatical ought to provide the extended time off work that regular vacation does not; (3) a legitimate sabbatical will always be granted in addition to regular vacation; and (4) a legitimate sabbatical program should incorporate some element demonstrating that the employee is expected to return to work for the employer at the conclusion of the leave.

All of these factors could be relevant in determining whether a program is a legitimate sabbatical or simply additional regular vacation. The court stated that "each case will have to be decided on its own facts." The court rejected the notion that a true sabbatical would be limited to upper management or professional employees; a sabbatical could be offered to all employees.

What Paton Means for Employers

Many companies use benefit programs in order to attract and retain talented employees, particularly in very competitive labor markets. California employers operating such programs should carefully review the terms of their sabbatical programs in light of this decision to ensure that they are clearly distinguishable from regular accrued vacation benefits.