"Use it or lose it" vacation policy and vacation pay at termination

STATE OF CALIFORNIA PETE WILSON, Governor

DEPARTMENT OF INDUSTRIAL RELATIONS
DIVISION OF LABOR STANDARDS ENFORCEMENT
LEGAL SECTION
45 Fremont Street, Suite 3220
San Francisco, CA 94105
(415) 975-2060

MILES E. LOCKER, Chief Counsel

September 17, 1998

Mr. Pepe Rodarte,
Personnel Manager
Babbage's Etc.
2550 William D. Tate Ave.
Grapevine, TX 76051

RE: Vacation Policy--Labor Code Section 227.3

Dear Mr. Rodarte:

This is in response to your letter of August 10, 1998, to Senior Deputy Labor Commissioner
Ysmael Raymundo, requesting an opinion as to whether the Company Vacation Policy you
enclosed (including proposed amendments and/or clarifications under the title "Revised
Vacation Policy Clarification") complies with California law. Under the policy, employees do
not commence to earn or accrue vacation until semi-annual target dates six to twelve months
after attaining full time employment. Thus an employee hired between January 1 and June 30
would commence earning vacation on January 1 of the following calendar year, and
employees hired between July 1 and December 31 would commence earning vacation on
July 1 of the subsequent calendar year. Under the policy, vacation is to be taken in the
calendar year in which it is earned, and cannot be "cashed out" except in the case of
employees whose employment is either terminated or converted to part-time employment,
which case pro-rata calculation of earned vacation is paid. Vacation is "credited" for use by
the employee on January 1 and July 1, respectively, with vacation time available for use as of
January 1 not being fully earned/accrued until June 30 of the same calendar year, and
vacation time available for use as of July 1 not being fully earned/accrued until December 31
of that calendar year. The policy prohibits employees from taking vacation time "during the
November and December holiday season." It is unclear whether this refers to two different
time periods (surrounding Thanksgiving and Christmas, I would presume), or whether it
encompasses the period from Thanksgiving through Christmas or New Year's eve.

The policy further states that vacation cannot be carried over into subsequent calendar years.
You describe this in your cover letter as a "use it or lose it" policy, but also state in your letter
that California employees "are required to take vacation or may carry it over if necessary." I
could not find any language in the written policy to this effect either in the written "Vacation
Policy" you supplied, nor in the "Revised Vacation Policy Clarification." The only reference in
either document specifically states, "Available vacation does not accumulate from one year
to the next."

"Use it or lose it" vacation policies are prohibited by Labor Code 227.3, See Boothby v. Atlas
Mechanical, 6 Cal. App. 4th 1595 (1992); Berardi v. General Motors, 143 Cal. App. 3d Supp. 7
(1983). A policy which prevents employees from accruing additional vacation time until using
some reasonable amount of already accrued vacation (commonly referred to as "reasonable
cap") is lawful under Section 227.3, but the policy must specifically describe the cap. The
policies you provided do not qualify. It is unlikely that any vacation policy in which the
vacation is not completely earned until late December, a period during which the policy
prohibits the employee from taking any vacation, would be considered lawful in any case,
since this puts the employee in the untenable situation whereby the employee risks taking the
vacation time prior to it being earned and subjecting the employee to either unlawful
deductions or a lawsuit against advances not earned in the event his or her full time
employment ceases, or having the vacation earned erased at the stroke of midnight on
December 31. Moreover, DLSE has consistently taken the position that a reasonable cap on
accrued vacation cannot occur unless the employee is given a reasonable period after the
vacation is earned (usually not less than seven months) to use the accrued vacation.
Prohibiting employees from accruing additional vacation during this period, in the judgment of
the Division of Labor Standards Enforcement, violates Section 227.3, which charges the
Labor Commissioner, the chief executive officer of DLSE with applying "principles of equity
and fairness" in enforcing that section.

Another portion of the vacation policy and revised clarification also appears to violate
California law. The policy states that employees whose employment is terminated will be paid
for unused vacation on the employee's next regular check. Labor Code Section 201 provides
that employees who are terminated must be paid all earned wages immediately at the time of
termination. Section 202 provides that employees who resign must be paid all earned wages
within 72 hours, unless notice of intention to quit was given 72 hours prior to the actual
cessation of employment, in which case the employee must be paid all earned wages at the
time of quitting. In other words, you cannot wait until the next regular payday to pay the
unused vacation, since under Section 227.3 the vacation constitutes earned wages.

Your "Revised Vacation Policy Clarification" also states that employees who "borrowed
vacation before it has been accrued/earned .... would only be paid the [earned portion]." It is
unclear how this would operate, since the employee in this scenario has already taken and
been paid for the "borrowed" vacation. If your policy is suggesting that a deduction would be
taken from the employee's final paycheck for hours actually worked, such a deduction is
illegal under California law. See CSEA v. State of California, 198 Cal. App. 3d 374 (1988).

I hope this responds to your questions. If you have any further questions, please do not
hesitate to contact me.

Very truly yours,

Miles E. Locker
Chief Counsel

cc: Jose Millan
Tom Grogan
Greg Rupp
Nance Steffen
Ysmael "Ray" Raymundo