Why it matters

A vacation policy that employees do not begin to earn vacation time until after their first year of employment is lawful, the California Court of Appeal has ruled, affirming dismissal of a former employee’s lawsuit. When Nathan Minnick left his job at Automotive Creations Inc. after six months, he was not paid any vacation wages in his final paycheck. He filed suit, alleging that the employer’s vacation policy requiring employees to work for a full year before accruing vacation days violated state law, which mandates that employers compensate employees for vested unused vacation time at the termination of the employment relationship. A trial court sustained the employer’s demurrer without leave to amend, and the appellate panel affirmed. While California state law requires employers to compensate employees for vested vacation time, employers may lawfully adopt a policy providing that employees do not earn vacation time for a specific period at the beginning of their employment, the panel explained. Therefore, because Minnick’s employment ended during his first year—before any vacation time vested due to Automotive Creation’s lawful policy—the plaintiff was not owed any vacation wages.

Detailed discussion

When Nathan Minnick began working for Automotive Creations Inc. in June 2014, the company had a vacation policy in place that provided employees would begin to accrue vacation benefits after the end of their first year of work. Specifically, the policy stated:

“In order that we all have the same understanding regarding vacation accrual, eligibility, use and payout, as well as sick days and paid holidays, I wanted to clarify [the] policy regarding each of these.

“All employees earn 1 week of vacation after completion of one year service and a maximum of two weeks’ vacation after two years of service. This means that after you have completed your first anniversary with the company, you are entitled to take one week of paid vacation, and after the completion of two years service, you will accrue two weeks paid vacation per year. This does not mean that you earn or accrue 1/12th of one week’s vacation accrual each month during your first year. You must complete one year of service with the company to be entitled to one week vacation.”

Minnick worked for the company for roughly six months. Consistent with the policy, he did not receive any vacation wages in his final paycheck because he had been employed for less than one year. He then sued for recovery of his vacation wages. He claimed Automotive Creations violated California law requiring an employer to compensate employees for vested unused vacation time at the termination of the employment relationship.

The employer demurred, arguing that its vacation policy was lawful and that it unambiguously stated that no vacation time is earned during the first year of employment, relying on Owen v. Macy’s Inc., a 2009 decision from the California Court of Appeal. A trial court judge sustained the demurrer without leave to amend, and the appellate court affirmed.

Section 227.3 of the California Labor Code requires employers to pay all vested vacation as wages upon termination. Interpreting this statute in 1982, the California Supreme Court held that once vested, the right to vacation pay is protected and may not be forfeited.

“Thus, although California law does not require an employer to provide its employees with any paid vacation, if an employer chooses to include paid vacation as a portion of the employee’s compensation, the employer is not free to reclaim it after it has been earned,” the panel explained.

More recently, the Owen court considered whether the rule against vested vacation pay forfeiture prohibits an employer from establishing a policy that an employee does not accrue vacation rights until he or she has worked for a specific period. In that case, the employee handbook imposed a six-month waiting period before new employees could begin to earn vacation time.

Although the Owen plaintiff argued that state law requires that an employee be credited with vacation time starting from the very first day of employment, the court disagreed, holding that the employer’s policy legitimately prohibited new employees from earning any amount of vacation for the first six months and, therefore, there was no unlawful forfeiture.

Applying these cases to the Automotive Creations policy, the panel found Minnick’s challenge to be legally unsupported as the precedent neither requires that an employer provide vacation pay vesting on day one of employment nor prohibits employers from imposing a waiting period.

“As Minnick concedes, an employer may lawfully decide it will not provide paid vacation,” the panel wrote. “By logical extension, an employer can properly decide it will provide paid vacation after a specified waiting period. This is similar to an employer’s authority to limit the amount of vacation pay that may be earned. If employers can lawfully restrict vacation accrual at the back end, it follows that employers can lawfully impose a waiting period at the front end.”

The plaintiff argued that the employer was attempting to “contract around” the rule against forfeiture of wages, but the court disagreed, holding that an employer does not contract around the forfeiture prohibition by providing that an employee does not begin to earn vacation pay until a certain date.

Nor did the court find merit in Minnick’s contention that the policy was ambiguous because it could be construed to mean that completing the first year was a condition to obtaining pay for the vested vacation benefit. “This interpretation of the policy language is not reasonable,” the panel wrote. “Viewed in a commonsense and reasonable manner, the policy language reasonably informs employees that their vacation accrual begins after the completion of their first year.”

Similarly, the policy could not be read that an employee receives the one-week vacation benefit as a vested benefit at the beginning of the second year, the court added. “An employer has the authority to ‘front-load’ the vacation benefit, permitting the employee to take a one week paid vacation during the second year, even before it is fully vested, but to provide that if the employee were to leave before the end of the second year, he or she would be entitled to only a pro rata share (the vested portion) of the benefit,” the court said. “An employer’s decision to do so does not provide evidence that it is requiring the forfeiture of vested vacation benefits.”

Finding that the opportunity to amend would not cure Minnick’s complaint, the appellate panel affirmed demurrer.

To read the opinion in Minnick v. Automotive Creations, Inc., click here.