It’s that time of year again. The sun is shining (except in San Francisco), the school year has ended and employees are stocking up on sunscreen in anticipation of their summer vacations. Before your employees head out the door, you may want to ensure that your vacation policies comply with California law. This advisory provides a summary of some basic rules.

Vacation leave not required

California does not require employers to provide paid vacation leave. However, if an employer has a vacation policy or practice, it must comply with various state law requirements.

Use-it-or-lose-it vacation policies are prohibited

Vacation policies may not cause employees to forfeit some or all of their accrued vacation if not taken by a specific date, such as the end of the year or an employee anniversary. That is because, under California law, vacation is treated as a form of wages that are earned as the employee works and that may not be forfeited once earned.

Caps on vacation accruals

An employer may place a cap on how much vacation an employee may accrue. Once an employee reaches the cap, the employee does not continue to accrue vacation until some of the accrued vacation is used or paid out during employment, if the employer requires a payout or allows employees to request a payout.

The California Division of Labor Standards Enforcement (DLSE) maintains that employer policies requiring that all vacation be taken in the year it is earned (or in a very limited period following the accrual period) are improper and will not be enforced. Employers therefore should be cautious in setting vacation accrual caps. California law is unclear about the minimum cap on accruals. A conservative approach would be to set the cap at no less than 1.75 times an employee's annual vacation rate, but a lower cap of 1.50 may also survive legal challenge.

Newly hired employees

A vacation policy may state that vacation pay begins to accrue upon commencement of employment. Alternatively, the policy may state that vacation pay does not begin to accrue until completion of an introductory employment period of, say, 60 or 90 days, or some longer period. Policies sometimes state that employees are granted a lump sum amount of vacation, such as five days, upon completing an introductory work period. However, despite the wording of the policy, the DLSE considers those lump sum payments to have accrued incrementally during the introductory period. Therefore, if an employee terminates before completing the introductory period, the employee should be paid a pro rata share of that lump sum amount.

Similarly, vacation policies stating that an employee forfeits accrued vacation unless the employee remains employed for at least six months, one year or some other stated period of time are illegal. Consequently, if an employer has such a policy and an employee quits or is terminated before completing the specified period, employers must pay the departing employee the accrued vacation amount.

Exempt salaried employees

An exempt employee may take a partial day vacation of no less than four hours, with that amount deducted from the employee’s vacation pay bank, without jeopardizing the employee’s exempt status.

Payout upon termination of employment

All accrued vacation must be paid out immediately upon termination (the same as wages), at the employee’s then applicable rate of pay. If an employee resigns without providing at least 72 hours’ notice of resignation, the employer has 72 hours to make the payment. The DLSE takes the position that vacation pay must be prorated on a daily basis for the purpose of calculating a departing employee’s vested vacation. Many employers choose to avoid the headache of calculating this daily accrual by giving the departing employee vacation credit for an entire week or pay period, even though the employee only worked part of that period.

A note about paid time off (PTO) and floating holidays

Leave that has been provided to an employee without condition is presumed to be vacation no matter what name is given to the leave by the employer. If the PTO policy allows employees, at their discretion, to use PTO for vacation, illness, family care and other reasons, then all of an employee’s PTO must be considered the same as vacation for purposes of payout upon termination and the other requirements.

This is also true for so-called “floating holidays,” which are sometimes granted by employers on an annual basis. Those days are effectively vacation days or PTO, unless their use is restricted to a particular event such as the employee’s birthday. Consequently, unrestricted floating holidays may not be forfeited if not used by year-end despite their label.