Episode 155: How to Handle Vacation, Sick Leave, Paid Time Off, Holidays

Welcome to the Workplace, a podcast by Cal Chamber. I'm Matthew Roberts, the Labor Law Helpline manager and Employment Law Council with the California Chamber of Commerce. Well, here in California, we've definitely entered the dog days of summer. With summer here, it means we are halfway through yet another year. And for many employers it means employees are probably ready to take a break. I know I am at this point. And many travel companies and related businesses are really expecting to see the busiest travel season since at least pre pandemic 2019, and possibly even busier for employers with vacation plans, many of their employees may be sitting on substantial banks of time now that they're itching to use, since we didn't use a lot of it over the previous few years. And though employers get to choose whether to offer vacations and generally how their policies work, California of course still has special laws for vacation plans. And further complicating our vacation plans is California's mandatory paid sick leave law and our obligation to provide protected time off to our employees under that law. As a result, paid time off, holidays and sick leave are some of the most common topics that we get on the helpline, especially during the summer. Because we see so many questions on the helpline, I just had to give my colleague and one of Cal Chambers Labor Law Helpline advisors, Ellen Savage to return to the podcast. So welcome back, Ellen.

Thanks, Matt.

Well, I thought we could start with some vacation policy basics because even the basics still seem to vex employers here in California. I think some of it's related to multi state employers who are used to rules in one area and not the other. I think other employers may have this misconception that because vacation is not required, they can just simply control how the policy works without any interference from the state. But as you and I both know, that's not necessarily the case. So Ellen, we ready to dive in?

I'm going to say if we're talking about vacation, I'm ready for takeoff. Matt.

Let's do it. Okay, Ellen, so what I thought would be a good place to start is really for you to describe for employers and for our listeners here, what are the vacation policy basics here in California? What are things that employers should know about as they're crafting or updating their vacation policies?

Well, I think the first one is, and a lot of employers do realize this already, is that vacation's not mandatory. Employers don't have to offer vacation, but when we do choose to offer it, the law treats it as vested wages. As I earn that vacation, it belongs to me and so as a result, here in California, we cannot have use it or lose it policies. That is my money, my vacation I've earned. If I quit, if I'm terminated, it has to be paid out. I like to tell my callers to think of a vacation bank as like they would think of their checking account. As money goes in that account, it belongs to the employee, stays there until they spend it, either by going to Disneyland or cashing it out when the employment relationship ends. And people always ask me, well, does vacation roll over from year to year? Again, if you think of it like a checking account, if you go in and open up a checking account at a Bank on January 1, you don't think to yourself on New Year's Eve, oh, good, my money rolls over to the next year. It just stays in that account until you take it out or until you close the account. That's exactly how vacation works in California.

So then if it works as vested wages. I know employers are always looking for ways to provide benefits, but also try and control overhead and costs, of course.

Right.

Especially in this inflationary day and age. So what can employers do to kind of put some not necessarily strict restrictions on there, but to make it so that the vacation policy doesn't just become a runaway bank of wages for the employer?

Well, the first thing some employers do is they don't have employees start accruing vacation right away. Maybe I don't accrue my vacation until I've worked for you for 60 days or 90 days or 6 months or even a year, and that's totally fine. So that's going to limit what is in vacation banks. We also might place a cap on the amount of vacation that I can accrue so that bank doesn't get completely out of control. We have to remember, though, that even, even if an employee doesn't start accruing vacation right away, let's say I start working for you January 1st, I don't start accruing until July 1st, that's fine. But let's say in August I quit, you are still going to need to pay me out for that vacation I accrue during that small time I was accruing. Even if you have a policy that says I can't use it yet, maybe I can't use it until after I've been with you for a year. So that causes a lot of confusion. You can say to an employee, maybe I start accruing on day one, but I can't use that vacation until I've been with you for A year. If I leave after six months, you still are going to have to pay me out half a year's vacation. So that use it or lose it rule is super important.

So what about defining who can get it? So if, if I as an employer want to offer vacation, but maybe not necessarily to my seasonal or my part time employees, am I able to differentiate between employees who and cannot accrue vacation time?

You absolutely can. Not at all unusual for employers to only offer vacation to full time employees. You might do it by department, office employees get vacation, warehouse employees don't, things like that. It's important though for employers to remember that they're going to need to address what's going to happen when an employee moves from one of those categories to another. I'm a full time employee on tooling along employee accruing vacation and then I switched to a part time employee. So I'm not accruing anymore. But what happens to that bank that I have? We can't just take it away. So that's important.

So what about controlling its usage? You know, some employees, and as I said at the outset of this podcast is we've got a lot of employees here who may be sitting on substantial banks of time, three, four, six, eight weeks of vacation, maybe a lot, because we don't have caps on our vacation plan. What can employers do about controlling its usage?

So briefly I want to go back to talking about that cap issue because maybe employers don't have caps and they should consider it. California law does allow us to place a reasonable cap on accrual. If you ask 100 attorneys here in California what's a reasonable cap on accrual, 99, maybe even 100 of them will tell you 1.5 the annual accrual amount. And that's nowhere in a code, it's nowhere in a case, just kind of a rule of thumb. So employers can first and foremost prevent those banks from becoming that big by placing a reasonable cap. But they can also do some other things. They can require the use of vacation time. Employees will often say, you can't make me use my vacation, it's mine to use when I want. But an employer can actually say, no, I need you to schedule some vacation. Your bank's getting too big, it's a slow time of year and an employer might actually schedule that vacation. You're going on vacation that third week of August. Or maybe a little more employee friendly, you might say, hey, you need to use some vacation time in the next two months. Something like that. You can absolutely do that.

Now, what about if somebody comes to you and says, I want to take four weeks of vacation, they got all the time in the bank. Can you restrict the amount of time that they use? For example, could you say, yeah, you, you can't take four weeks. Right. Like, we can't have you gone for four weeks, but we'll give you 10 days or two.

Absolutely fine. Employers have the right to either deny vacation requests for legitimate business reasons. They can limit the amount that can be taken at once. They can have blackout periods. You know, it's our busy season, we're a swim school. You can't take vacation in the summer. That is generally fine. Now watch out, because if an employee is on a protected leave during that time period, and that protected leave specifically allows an employee to use vacation, then even if it's your blackout period, the law is going to probably take precedence over that. But otherwise you have the right to decide. Employers can also deny vacation requests due to coverage issues. You know, there's too many people from my department already going to be on vacation that week and too bad, if I want to go to Disneyland, you can't do without me that week, and that's okay.

Yeah. And I think, you know those protected leaves that you kind of mentioned there, things like pregnancy disability leave, the cfra, fmla, those rules specifically allow for an employee to use vacation time if they so choose, in accordance with the law. So that's the kind of thing there where we couldn't deny vacation usage if they're using protected leave. Speaking of protected leaves, we of course have the California paid sick leave here. Not going to belabor too much about it, but we know that we have to provide a certain amount of time for California paid sick leave in order to comply with the state law or local ordinances that may apply to our jurisdictions. And a lot of our employers get the situation where the employees know vacation time is vested wages and California paid sick leave time is not, where it doesn't get paid out at the end. So they want to use their paid sick leave bank for things like vacation or other personal time off. What does an employer have as a recourse if an employee tries to use it in that fashion?

Well, I think it's just not a wise idea to allow employees to use their paid sick leave for vacation purposes. You know the old phrase, no good deed goes unpunished. This is unfortunately one of those situations. You might want to let your employee take time off. They're out of vacation, they don't want to use their vacation. So you say, sure, go ahead and use your paid sick leave day. But because Disneyland is not one of the reasons listed in the sick leave law, you may be turning your unvested paid sick leave into a vested vacation or PTO bank. Because I can use it for whatever I want, and that is under California law, one of the things that makes a bank vested and payable at termination is when it is not limited to certain specific purposes. So if you let me use a sick leave day to go to Disneyland, then I could argue that that bank is now a vested bank payable at termination. So you want to be nice, but it could come back to bite you.

All right, Ellen, these rules are too much. And what we're starting to see from employers now more commonly is they're exploring things like flexible or unlimited paid time off plans where an employee doesn't necessarily accrue this time off, but can just kind of take time off whenever or move their schedule around whenever and towards this, like, flexible approach.

For employers. The perk here is that there's no vested wages.

In the instance of a flexible time off plan because they're not accruing hours. They take time off as they want to take time off kind of deal. But I do think we should highlight, really that there's way more questions than answers with this type of plan. Right, Ellen?

Oh, absolutely. People call me all the time with questions about unlimited PTO plans, and the first thing I tell them always is, look, this is the wild, wild west of labor law. There just are no rules. We only have one real case to date on this topic. And in that case, unfortunately, the employer lost. And so we just don't really have any good idea of what a solid unlimited PTO plan looks like. The Labor Commissioner really hasn't provided us any guidance on unlimited PTO plans. That one case I was talking about, the McPherson case, basically said, look, an employee's or the employer's unlimited paid time off plan was not a good one. One did not fly with the court. They did say, however, that you could potentially have an unlimited PTO plan if it states that the employee's PTO is not a form of additional wages, but instead forms part of a promise of a flexible work schedule. And if it defines clearly the rights and obligations of employees and employers and the consequences of fail linked to scheduled time off, it would have to allow employees sufficient opportunity to take time off. And this is the one that I think is the scary part. It has to be administered fairly so it doesn't result in equities. So Some employees work a lot, others work less. My department's super busy right now, so I never get to take time off. And now when you terminate me, I go, hey, it's not fair. Mike over there just took four, four weeks off and I'm walking out the door with nothing.

So, you know, the McPherson case basically said, we don't like your plan and if you did these things, we might like another plan, but we really don't guarantee it. So let's just have another case come along. We'll see what we think of that one. And that makes me nervous.

Yeah. And for me, you know, when I talk in leave of absence seminars and our boot camp seminars as well, we always have this section on CFRA and FMLA and PDL leave where, you know, employees are able, like I said before, are able to take vacation where they want to. And would you be able to apply an unlimited PTO plan in those contexts? Flexible pto, how would that work? You know, can we exclude that from the plan and still have an unlimited plan? I've already come up with half a dozen questions here that are unanswerable, and I'm sure there's a dozen more if we spend some time thinking about it. So really for us, it's get legal counsel if you're going to form one of these plans, because honestly, if you're not driving with guidance in place to show you, you know, what kind of plan you can have, like we do with regular vacation plans, you can end up in a situation like this McPherson case where you get hit for massive vacation wages, damages. And of course the. Because they're wages, you get hit with waiting time penalties and all the stuff that goes with it. And then if you do that with a whole class of employees, well, now you have a class action for all those employees as well. So a lot of risk in doing what Ellen says here and going out into the wild, wild west on this one. So let's move off of vacation PTO plans and the like. And let's talk about holidays. There's actually a couple this summer. Right. So they're fun, they're added benefits for us as employees and employers like to give these things as well. And similar to vacation plans, the employer is in charge of whether to even offer this in the first place. So what I want to talk about first is we have the Juneteenth holiday that occurred last month. We've got Independence Day that's occurring this month. And these are federal and these are state government holidays that they've been set by statute, by code, by law, does an employer have to provide paid time off for these holidays that are set by the governments?

Nope. There is no state or federal law that requires that employers provide paid holidays. We like to say that holidays are not holy days in the eyes of the labor laws. You don't have to shut down on the holiday. If you do shut down on the holiday, you don't have to pay your employer.

Well, except maybe your exempt employees. You know, we don't want to get into a whole discussion of exempt salary requirements, but be careful because if you're shutting down 4th of July and your exempt employees are prevented from working, they get paid regardless of your holiday pay policy. But otherwise, no, no employees are entitled to paid holidays.

And you know, as with vacation, you know, with this being our own policy, is the employer then on the hook for any laws Here in California once we decide that we offer holiday paid pay?

Yeah. So if we decide we want to offer holiday pay, then we're essentially creating a contractual obligation that I'm going to get paid while I stay home and, you know, eat watermelon, light up the fireworks with my kids on fourth of July. So we're going to have to address issues like, well, what do we do if we turn out that we need you to come in on 4th of July? I've already promised you the day off with pay. Now I need you to work. What do I do here? And there's lots of options. You can, and this is my preference, just because it's simpler, pay the employee for all the hours they work on that holiday. Let's say they work eight hours on 4th of July, tuck an extra eight hours of holiday pay at stray time into their paycheck, you're done. You could pay them for all the hours they work again, eight hours, let's say, on 4th of July, and then provide them another day off in lieu of that extra holiday pay. The concern I have here is when does that holiday have to be taken? In the same week, in the same pay period, in the same month. It's really easy for that data end up getting lost. Everybody forgets about it, and then it becomes the subject of maybe a waiting time penalty claim when it's not paid out at termination. So that is a little bit more complicated.

So that raises a good point. Right? Because we have our set holidays. We have the Christmas, Thanksgiving, New Year's, July 4th, all those holidays that are pretty traditionally standard for us. But some employers, I've heard a lot of this offer floating holidays. Yeah. The most Common examples are, hey, we want to give you floating holidays because we think the anniversary of your hire date is special to us, and we'd like to celebrate that. Plus, you wouldn't have joined us unless you were born. So your birthday is special to us as well. We'd like to offer those, too, as floating holidays. How do floating holidays work in this whole scheme, Ellen?

So, Matt, you know, I gotta say, here in California, I don't get why employers use floating holidays. People call me about floating holidays. They want to know their employees leaving. Do they have to pay them out their floating holidays? And I ask the same questions, just like you're talking about, is it tied to their anniversary? Is it tied to their birthday? Is it tied to the, I don't know, the day the company was founded, whatever? Oh, no, no, no. It's just whenever they want to use it. So I say, so if I want to go to Disneyland today and I call and say I want to use a vacation day, can I use it? The answer is yes. So if I call today and say I want to go to Disneyland and I want to use a floating holiday, can I do it? Yes. So what's the difference? They're both days that are not tied to a particular event. And this is such an easy place for an employer to get tripped up and end up in a very expensive lawsuit.

Yeah, exactly. And, you know, if you want to actually offer that, then, as Ellen says here, you're tethering it to specific events. So my birthday is actually within a couple days of us recording this podcast, Ellen. So if the chamber wanted to give me a floating holiday for my birthday, they'd be requiring me to take it right around my birthday. And as you said, you know, is it a day? Is it a couple days, is it a week? You want to make sure it's tailored right there with the day for which we're giving the holiday, or else, you know, it's vacation wages. So, Ellen, moving off holidays, I want to finish up with what's known as one size fits all PTO plans. The reason we call them that is because the California paid sick leave law allows us to wrap the requirements of that law into our existing PTO plans, as long as, of course, it meets the requirements of the law. And so now, as employers, we only have one bank we have to administer, Right? We don't have to keep track of all these different banks. Seems kind of easy. We just have one PTO bank. But there's a lot of things we like to caution against with that, Ellen. And what is it that you like to tell employers about one size fits all PTO plans?

So I understand the pull of a PTO plan. It looks and seems like a really great way to just put everything in a single bank. But here's what I tell people. Combining your sick plan and your vacation plan into a PTO bank is like taking all the pieces from Monopoly and chess and throwing them on the same board and then trying to play a game. Those games have very different rules, just like Sick and Vacation have very different rules. So I ask people, you know, when you do that, do you move your pawn or maybe your queen around the board and when you pass go, you collect $200 or do you try to checkmate your opponent's king? When you land on Park Avenue and buy a hotel, you're looking at two different sets of rules, and it causes a lot of confusion. And when people call me and say, okay, my employee wants to use all three weeks of PTO that they have for sick leave, but I only let them use three days of sick leave, I say, well, how do you know how much of that PTO bank is sick leave? We don't.

And that's the primary issue there, right? Because the labor commissioner here is the one who's really charged with administering both the vacation rules and the PSL rules. And when they look at the banks and they see one bank that's designed to meet a vacation plan that we by contract are giving to our eligible employees, and then also by law, we're trying to meet the requirements of the paid sick leave, the labor commissioner just ends up doing what you said, and they play two games with it. They apply vacation rules to a bank that doesn't need it. They make the whole bank subject to the California paid sick leave rules because they just don't know any different. They can't tell the difference between the banks. And that's a huge concern. And so what, Ellen, I think you highlighted really well there is how do you track if you're really trying to separate these banks? And the way you track is you separate the banks, right, Ellen?

Oh, Matt, that's music to my ears, honestly. If you ask any of us here on the helpline whether you should have a PTO bank or separate sick and vacation, we're going to tell you to build a brick wall between those two banks. Because otherwise you get questions like, well, what's a cap? Sick leave says 48 hours vacation. Cap is reasonable cap on accrual like we just talked about. How do you set your caps And Lord help you if you're in a local area that has a local sick leave ordinance that you're trying to layer in on top of that as well.

Yeah, that's just head spinning.

Yeah. And it's ripe for trouble. Even if you're trying to do right as an employer, there's so many rules that are intertwined there. It's pretty difficult to administer. Well, Ellen, thank you so much for taking some time out of the day and lending your expertise here to the podcast. I do hope you have some time off scheduled as well.

Maybe I'll go to Disneyland.

And thank you listeners, for joining this discussion on the workplace. Please comment, share and subscribe to Cal Chamber's podcast by visiting calchamber.com.