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Employers in California May Not Enact “Use It or Lose It” Policies for Accrued Vacation Time

When an employee parts ways with an employer—whether by the employee’s choice or the employer’s—it is often a difficult process of transition. Among many important questions for the employer to consider is the total amount of compensation still owed to the employee. This includes any wages owed for time worked up to their final work date, barring any unusual circumstances. What about less tangible compensation, though, such as paid vacation leave? Some employers readily pay departing employees for unused vacation time, while others take a “use it or lose it” approach. Laws vary from one state to another, but California law clearly states that an employer must compensate a departing employee for accrued vacation time, or potentially face civil liability for unpaid wages.

No state requires an employer to provide paid vacation time to their employees, but state employment statutes generally require employers to abide by any written or otherwise formalized employment policies. If an employer does offer paid vacation time, a common method is to allow a certain amount of paid vacation time for certain periods of employment. For example, an employee might accrue one day of paid vacation, at their then-current rate of pay, for each month of employment. California and several other states prohibit employers from enacting policies stating that accrued-but-unused vacation time expires upon an employee’s termination or resignation.

If an employer’s policy is to compensate employees for unused vacation time at the end of their employment, the employer must apply that policy consistently. An employer’s policy could identify specific circumstances in which it would not be obligated to pay an employee for unused vacation time, but the employer must also abide by those provisions consistently. In practice, compensation for unused paid vacation might look like this. An employee with five days of accrued vacation time gives notice that July 31, a Friday, will be their last day of employment. Their final paycheck will include wages owed through July 31, as well as five additional days’ worth of regular wages.

California law requires employers to follow their own policies and contractual provisions with regard to “vested vacation,” except that neither its policies nor any employment contract may include “forfeiture of vested vacation time upon termination.” Cal. Lab. Code § 227.3. See also 56 Ill. Adm. Code §§ 300.520(e), (h); Beard v. Summit Institute, 707 So.2d 1233 (La. 1998). It allows an exception for employees subject to a collective bargaining agreement.

The California statute is one of the most restrictive laws in terms of what employers may not do. Some states’ laws addressing this issue only apply when an employer’s policy is otherwise silent on the issue. See, e.g., N.Y. Lab. L. § 198-c. Other states allow an employer to enact a “use it or lose it” policy but require that they notify employees and give them a reasonable opportunity to use accrued vacation days. See, e.g., Mass. Gen. L. ch. 149 § 148, Mass. Atty. Gen. Advisory 99/1.

If you or your business needs assistance with a legal matter, a skilled and experienced employment law attorney can advocate for your interests and help you understand your business’ rights and obligations. Cirrus Law PC has practiced business and commercial law in the Bay Area since 1976. Contact us online or at (925) 463-1073 today to schedule an initial confidential consultation with a member of our team.

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