Employees are often shocked to learn that employers are not required to provide paid vacations. But it’s true. Legal guarantees of paid leave abound in other advanced economies, but not in the United States, and not even in California. Indeed, the effect of California law is to discourage employers from voluntarily providing paid vacation, because California peculiarly mandates that if the employee offers paid vacation, then the vacation pay must be deemed to vest, with any unused portion being due when employment ends. So “use it or lose it” policies, for example, are not enforceable in California.

In response to this annoying California peculiarity, some employers have considered adopting “no vacation” policies, and “unlimited time off” policies for exempt employees. Below is a quick primer on such policies and some issues to consider before changing existing policies.

Q.        Do I have to provide employees paid vacation time? No. California law does not require employers to provide its employees with any vacation at all—paid or unpaid, contractually or as a matter of policy—as part of their compensation package.

A common expectation, however, is for employers to provide some level of paid vacation for full-time employees as a fringe benefit, to remain competitive with employers that do provide the benefit.

Q.        Our company has a vacation policy in effect now, but we would like to switch to a “no vacation” policy. Is this acceptable?  It may be, depending on how it is implemented. In an at-will, non-union work environment, an employer may, with adequate notice, unilaterally change the terms and conditions of employment, including any vacation plan. The notice should provide employees with adequate time to adjust by, for example, using their accrued vacation before the policy takes effect.

In addition, any accrued, unused vacation that the employee does not use before the new policy begins would still belong to the employee. The employer would have to pay off that balance at some point, such as the time of the policy change or when the employee is terminated, at the latest. An employer that chooses not to pay out unused vacation pay could let employees use the time during other unpaid times off, including leaves of absence. Allowing the time to remain in the “bank” during the remainder of the employee’s employment, however, could require the employer to pay the accrued vacation at the final rate of pay, which usually would exceed the rate in effect when the vacation time was earned.

Q.        Our company has an earned vacation policy in effect now, but it’s too hard to manage. I hear there’s this “unlimited time off” concept. Is this acceptable? Perhaps, depending on the type of employee. These policies have yet to be widely scrutinized or litigated, so it is still unclear what exactly the DLSE or the law requires.

Exempt employees. The idea behind these policies is that exempt employees can self-manage work schedules and workloads, within reasonable restrictions, to take paid time off whenever the work permits. The employee whose work suffers from too much time off would be performance-managed. An “unlimited time off” policy would aim to avoid the problem that could arise if exempt employees work on their vacations and thus end up taking substantial amounts of time off while still maintaining large vacation balances.

Because no paid vacation would thus be earned, the departing employee would have no accrued, unused vacation pay to collect at the time of termination.

An “unlimited time off” policy for exempt employees should be carefully crafted so that the DLSE does not view it as a “subterfuge” to hide an unlawful “use it or lose it” policy. For this reason, it is best to avoid any specific limit on the total amount of time off an employee may take. But an “unlimited time off” policy for exempt employees could include safeguards, such as (1) requiring manager approval for significant lengths of time off, (2) imposing a business-needs requirement to ensure that employees remain available during critical periods, and (3) specifically stating that time off taken for leaves of absences or sabbaticals would be excluded from the definition of “unlimited time off,” and thus, would not be paid.

Non-exempt employees. Generally speaking, “unlimited time off” policies for non-exempt employees would be difficult to manage, if not wholly impracticable. Non-exempt employee job duties by their nature generally require supervision, and thus are incompatible with a time-off policy that would allow the non-exempt employee discretion in managing the time needed to accomplish work goals. Likewise, while exempt employees get paid the same amount regardless of the number of hours worked, non-exempt employees generally get paid on an hourly basis, for only the time worked, which employers must record, a task that also seems at odds with an unlimited time-off policy. Much easier to manage with non-exempts would be a policy that would pay them when they work, while enabling them to take unpaid time off within limits.

Workplace Solutions: Check Your Policies!

Employers should remember that California subjects “vacation” and “paid time off” to the same restrictions. Any paid time off that can be used at the employee’s discretion and is not tied to a particular event (like your birthday) is considered vacation. This includes unrestricted “personal days” and “floating holidays.” They are all vacation under the eyes of the law.

Thus, an employer that wants to eliminate vacations must first closely examine its existing policies to determine how this sort of change would affect any other time-off policies, particularly any legally required leaves of absence such as those resulting from accommodating a disability, leaves under the California Family Rights Act, and leaves under California’s pregnancy disability leave laws and regulations (click here for our Leave series).

Seyfarth’s California Workplace Solutions lawyers can help employers draft or revise policies to implement desired changes and navigate California’s complicated interplay of various rules and regulations, giving you a vacation from worrying about the next lawsuit.

Chelsea Mesa