Why it matters: Although this decision is unpublished, it provides a lesson on the potentially expensive ramifications of maintaining an illegal vacation policy. Not only was the company ordered to pay employees for their lost vacation and personal choice time, the court found that the company’s illegal behavior tolled the statute of limitations, allowing the class to recover not just over the four-year period prior to filing the suit, but dating back an additional decade. The company managed to score one victory with the panel’s ruling on how damages should be calculated, however, holding that vacation pay is determined by the employer or contract.

Detailed Discussion

A “use it or lose it” vacation policy violated state labor law, and a class of 178 employees is entitled to millions of dollars in damages, the California Court of Appeal determined.

The unpublished opinion affirmed a ruling for the class of employees but remanded the case for a recalculation of the damages owed, previously set at roughly $8.3 million.

Lexmark International spun off from IBM in 1991 and instituted a policy later that year that required employees to use all of their earned vacation and personal choice days by year-end. Vacation earned in a given year and not used was lost. Tweaks were made to the policy over the years–switching from an employment anniversary date to a calendar year to calculate the appropriate number of days–but it remained in place for roughly 15 years.

In 2005, an employee sued Lexmark, alleging that the policy violated Labor Code section 227.3 by effectively depriving California employees of earned wages. The court extended the period of potential liability beyond the four-year statute of limitations and certified a class of 178 current and former employees.

Following a bench trial, the court entered judgment for the class. Vacation pay is a form of deferred compensation that vests as labor is rendered, the court held, and Section 227.3 protects such vested wages.

The parties battled over the correct calculation of damages for the class. The court ultimately entered an award totaling $8,299,242, with additional amounts for attorney’s fees and costs.

In addition to damages for the Labor Code violation, the court found that Lexmark ran afoul of the state’s Business and Professions Code. It therefore ordered the defendant to notify its California employees in writing of their rights and to develop and implement legal vacation policies.

On appeal, Lexmark challenged nearly every finding and conclusion by the trial court, from certification of the class to the amount of damages to the award of attorney’s fees to the inclusion of certain class members.

But the panel upheld the majority of the trial court’s holdings. Lexmark’s vacation policy violated Section 227.3, the court confirmed. “The evidence in this case established that, beginning in 1991, [Lexmark] adopted a policy that required class members to take vacation and personal choice days. A number of employees lost vacation and personal choice days as a result of the policy. Under the policy, employees were only paid for vacation time accrued during the years they were terminated without regard to prior vested vacation which had been forfeited,” the court wrote. “We agree with the trial court’s determination that [Lexmark] had an illegal policy that forced its employees to either use or forfeit already accrued vacation time in violation of section 227.3.”

Tolling the statute of limitations to allow claims dating back to the policy’s inception in 1991 was also appropriate, the panel said. “By concealing its unlawful conduct from its employees, [Lexmark] precluded class members from bringing the action within the statutory period,” the court wrote.

However, the panel did find error on one issue, ruling that calculations should not be based on gross pay. Rather, the base rate of pay for class members should apply, excluding commissions. Lexmark’s policy “has always stated that vacation pay is calculated at ‘base rate,’ ” the court wrote, and therefore damages should be similarly awarded. Two opinion letters from the state Division of Labor Standards Enforcement provided support for this reasoning, the court noted, stating that the rate of vacation pay is determined by the employer or contract.

The court remanded the case to the trial court for a recalculation of damages.

To read the decision in Molina v. Lexmark International Inc., click here.