Floating Holidays” are typically a fixed number of personal days that employees may use at any time during the year over and above any vacation, sick or other paid time off (“PTO”) they may have.  Usually such days do not accrue under the employer’s policy and are not paid out at the time of termination.

Those of you familiar with some of the idiosyncrasies of California wage and hour law are probably aware that “use it or lose it” vacation policies are not permissible, while bona fide sick leave policies may be set up in this fashion, and the treatment of holidays (such as Christmas and Thanksgiving) is largely left up to employers.

What you may not know is that California views “Floating Holidays” as little more than a linguistic disguise, and they can spell trouble if not managed properly.  If the Floating Holidays may be taken at any time, then California will consider them to be vacation days and they will be governed by all of the same rules, including automatic accrual (subject to reasonable capping) and payout upon termination of employment.  If, on the other hand, the Floating Holidays must be taken on (or within close proximity to) specific events such as employee birthdays or anniversary dates, then California will treat them like any other holiday.

One way employers can avoid confusion and potential pitfalls is by not offering Floating Holidays to their California employees at all and instead institute a combined PTO policy. 

If Floating Holidays are offered, there are some things to keep in mind:

  1. The written policy should clearly reflect when Floating Holidays may be used and what happens when they are not.
  2. If the Floating Holidays must be used on or near specific days, treat them the same as other holidays and spell this out in your written policy.
  3. If the Floating Holidays may be taken at any time, they will be treated as vacation days under California law.  Accordingly:
    1. Be sure to track accrued and unused days because they must be paid out at the time of termination along with any other wages owed.
    2. Consider capping Floating Holidays as you would vacation time so that they do not accrue indefinitely for employees who do not take them.  Reasonable caps (usually 1.5 to 2 times the annual accrual) may be applied such that once employees reach the cap, they do not accrue any additional time until some time is used.

 If you do decide to offer your California employees Floating Holidays and to cap them, be careful that you do not inadvertently turn the cap into a frontloaded “use it or lose it” policy.  Here is an example of how this may occur:  On January 1st each year, an employer grants its employees 2 Floating Holidays to be used any time during the year, and caps accrual at 3 days (1.5 times the annual allotment).  Because the employer uses January 1st as the date that it grants Floating Holidays, it looks at employees’ accrued days on that date in order to determine how many new days, if any, each employee will receive for the year.  An employee who is at the 3-day cap on January 1st will not be granted any Floating Holidays for that coming year.  The problem with this practice is that employees may lose some or all of their annual Floating Holidays based on their accrual status on a single date (i.e., if an employee with 3 accrued Floating Holidays has not used at least 2 of those days by January 1st, he or she will lose some or all of the Floating Holidays for that coming year).  Thus an employee who happens to take his or her 2 Floating Holidays for 2013 in December of that year, will earn 2 Floating Holidays for 2014, but an employee who waits until January 2nd and 3rd of 2014 to use the 2 days from 2013 will not earn any Floating Holidays for 2014.  This is the classic “use it or lose it” scenario just shifted by one day from December 31st to January 1st.  This result can easily be avoided by treating the accrual just as you would vacation time and allowing employees to earn their 2 Floating Holidays at any time during the year that they fall below the cap, not just on January 1st.

In summary, consider combining PTO for your California employees instead of offering separate “Floating Holidays.”  This will simplify administration and avoid confusion.  If you do offer Floating Holidays, be sure to decide whether they will be treated as vacation (taken at any time) or as holidays (tied to a specific event), spell this out in your written policy, and follow the applicable set of rules.