Episode 86: Vacation Policy Best Practices

Welcome to the Workplace, a podcast by Cal Chamber. I'm Erica Frank, Cal Chamber's Executive Vice President and General Counsel. Joining me on the podcast today are two of Cal Chamber's employment law experts, Matthew Roberts and Bianca Saad. Welcome, Matt and Bianca.

Thank you, Erica.

Welcome back. I should say you guys are regulars. Now, today we are going to delve into the topic of vacation and leave policies and discuss some issues, common issues that come up for employers on this issue really related to vacation policies. Right. Because we know in California there are some rules that employers have to follow with regards to vacation. And one of the most common problems are questions that we receive on the labor law helpline and that HR professionals face has to do with developing and implementing vacation policies. So let's just get started and dive right into some of these questions. So with vacation policies, does the law require us to have vacation policies in California?

No. Vacation policies actually are not a required benefit. So it's something that employers can provide at their option. But there are certain rules, so to speak, that they need to follow if they do allow employees to accrue vacation.

So what would those rules be?

Well, for instance, one of those is that there cannot be a use it or lose it policy. Those are illegal in California. So policies where an employer basically says if you don't use your vacation by the end of the year or a certain date that it's going to go away, those are not allowed. Vacation is treated the same as earned wages, and those vest and accrue as the employee works. Once they have accrued that time, they are entitled to that. So in an event where, let's say, an employee separates from employment and they have accrued an unused vacation on the books, that's going to be paid out to them.

Okay. So with regards to use it or lose it policies, and while it may be valid in some states, in California, the employer can't say, if you don't use your vacation by December, it goes away.

That's correct.

What about caps on vacation?

Yeah. So unlike use it or lose it policies, the law here in California allows for a reasonable cap on accrual. And the difference here is that we're just limiting how much that they can accrue, not necessarily taking away what they have already accrued. And so that's the difference. A long time ago, we used to have a labor commissioner opinion letter that said 1.5 times the annual accrual rate for an employee was a reasonable cap. The letter is no longer in existence for us. But the idea behind a reasonable cap is that gives them enough opportunity to take the vacation time that they've accrued within a year. So. So if we stay within that 1.5 to 2 times their annual accrual rate, more than likely you're gonna fall back within that reasonable cap percentage. Where you run into some problems is if we're capping it before the annual accrual and these kind of things, the Labor Commissioner sees that as kind of a way to get around these use it or lose it policies that are.

Unlawful here in California, and correct me if I'm wrong, but the way the caps operate is the employee works and, and accrues time until they reach that cap, and then they do not accrue any more vacation time until they take some time so that the cap is used or the time falls below the cap and then they start to work again and they hit the cap again.

That is absolutely correct, Erica.

All right. With regards to when an employee can start earning or start accruing vacation, what happens in instances where an employee is hired, They're a newly hired employee, and they say, hey, by the way, I had this vacation planned. I have a trip to Hawaii, it's a week long that I'm supposed to take in a month, and the employee is not going to accrue enough vacation to take that week long trip. Can an employer just advance vacation to them?

That is something that an employer can do at their option, but they do need to be aware of an issue of how that could come about in that scenario. So let's say that an employer has advanced the vacation, the employee takes the vacation, they still owe, so to speak, the vacation, and then they separate from employment. So employers have to be careful that they're not engaging in what's referred to as self help by then deducting that owed vacation from their final pay.

Okay, right. So final pay. Right. They have the accrued time. So let's. And it is paid out at their current rate. Their current rate of pay. So if I'm separating from my employer and I have 40 hours of vacation on the bank, I'm getting paid those 40 hours at my current rate of pay. But if I was advanced time and I'm now leaving and I haven't basically paid my employer back for that advance time, the employer pretty much eats it, so to speak. Right?

Yeah.

The employer can't say, oh, hey, Bianca, you gotta pay us back for those five days of vacation that we gave to you when you went to Hawaii.

Right, Right.

Okay. So it's kind of one of Those no good deeds goes unpunished type scenarios. Right.

What about as far as when an employer is considering crafting a vacation policy? Are there any things that employers should be aware of or concerns that they should be aware of when they're crafting their policies?

Yeah, it is important to have a policy, I think, in the first place because it'll define the parameters of your vacation that you're offering to them. It'll define the accrual periods. It'll talk about where there's instances where you'll require vacation usage. For example, when we talk about leaves of absence, in some cases, you can require vacation usage during those unpaid times. But we need to have that in the policy. Right. Because the labor Commissioner says we need to provide reasonable notice to employees when we're forcing the vacation usage. Where you run into some problems when you're crafting your vacation policy is some employers have come up with a policy where, you know, they'll just drop lump sums of vacation into someone's bank as they reach certain periods of service. Right. And what the labor commissioner has a problem with on that is it seems like you're trying to avoid the. It's accruing as your worked principle on vacation. And so if someone doesn't reach a benchmark, let's say take for example, you don't get any vacation until we drop a lump sum 40 hours on your anniversary date. Right. The Labor Commissioner says, well, you're just trying to avoid providing accrued vacation during that first year because if they leave or if you terminate them anywhere between that zero to one year mark, they're not getting anything now. Right. And they should have gotten it as they've worked. So you have to be careful with kind of how you craft these policies because they are governed just generally under principles of equity and fairness. And so the Labor Commission is always looking to see if there's something going on where you're trying to get outside of the scope of this. We can always put in a provision in there where you don't start accruing at a certain time, and that is totally fine. Right. So we just say you do not start accruing vacation for the first year of your employment, and then you will start accruing it as you work after that anniversary date. That gets around what's known as that cliff vesting issue where you just drop it in on lump sums on particular dates. But it's good because it'll also resolve disputes. Right. The Labor Commission will look at your policy and see how that's enforced and how that's being implemented to determine how disputes will be around. So if you're offering paid time off or you're offering vacation, it's absolutely a best practice to get that into a written policy in your handbook or some other manual.

That's a great place to close out today with regards to talking about the importance of having an employee handbook or employer handbook, I should say. And then also talking about the vacation policies and really taking the time to outline in that policy what the parameters are, what the accrual rate is. You know, if there's a cap, what that cap's going to be, what it's going to look like. You know, a lot of employers do allow higher caps based on the length of service, so they start just accruing faster, more time as they are working for you longer. But all of that does need to be in the employee handbook policy and procedures.

Right. And if I can add on a little bit more to that, you know, we've started to see some things on unlimited PTO and employers asking, well, how does that impact with these vested wages that we've just been talking about today? And the answer is still really unclear. Those are kind of new creations where employers are starting to broaden who gets that unlimited pto? Right. It used to just be reserved for those very high level officers who we know have to get the work done and so they're not going to really use it. But now it's being expanded out because employers don't want to provide the vested wages upon termination. But how does that work? And the answer is it's still really unclear. Right. But one thing we've gotten recently, this year in a case, really one of our first cases on unlimited PTO is that the court was really looking to see what your policy is. If you're going to have an unlimited PTO policy, we've got to have that policy, you know, out there in place and not just provide it as kind of a practice that we have.

That's a really good point to add. Thank you, Matt. And thank you, Bianca. Thank you guys both for being here today again and talking about an important issue. Even though the summer is starting to end and folks are still using vacation time and it's always a good idea to just remind employers of what the parameters are surrounding vacation policies and making sure that we don't run into some of the common pitfalls with regards to administering vacation in California. And thank you all for joining us on the workplace. Please comment, share and subscribe to Cal Chambers podcast by visiting calchamber.com.