Companies doing business in California should note that, on November 23, 2009, the Chief Counsel of the California Division of Labor Standards Enforcement (“DLSE”) issued an Opinion Letter on behalf of Labor Commissioner Angela Bradstreet, in which the DLSE modified its position on the issue of making deductions from vacation and sick leave balances accrued by exempt employees for the purpose of covering partial-day absences. The Opinion Letter brings California law more in line with the federal Fair Labor Standards Act regarding the “salary basis test” and deductions from exempt employee paid time-off accounts for partial-day absences.

Under California law, one of the requirements for exempt status is the payment of a fixed, predetermined salary to employees for any day in which the employees perform any work. In short, unlike non-exempt employees, there cannot be an hour-for-hour reduction in pay because the exempt employee works less than his/her typical hours on a particular day. The Opinion Letter states that while an employer cannot reduce an employee’s pay for working a partial day, the employer can implement policies permitting the employer to reduce vacation or sick leave hours an employee had accrued to correspond with the amount of hours the employee took off during the partial day, without endangering the employee’s exempt status.

This Opinion Letter potentially has financial significance for California employers since employers who decide to provide vacation to employees must comply with certain requirements. California law generally treats accrued vacation as deferred wages. Accordingly, employers cannot have a use-it-or-lose-it vacation policy and must pay out any accrued, unused vacation at the termination of an employment relationship. If an employer is permitted to reduce an employee’s vacation hours for partial-day absences, then this could potentially affect how much the employer needs to pay the employee at termination.

While DLSE Opinion Letters are not binding precedent for California courts, and courts do not give deference to DLSE Opinion Letters, the courts do recognize their persuasive value. We will have to wait and see if the California courts adopt the DLSE’s latest position.