By Steven Schneider and Hilary Feybush

Building on earlier vacation policy decisions, a California Court of Appeal recently held in Minnick v. Automotive Creations, Inc.  that employers may impose a clearly expressed waiting period before an employee can begin to accrue vacation time.  This means that  employers do not have to provide vacation pay vesting on day one of employment.  While an employer cannot contract around the rule against forfeiture of wages, an employer does not do so by unambiguously providing that employees do not begin to earn vacation pay until a certain period of employment has occurred.  However, once vacation pay under an employer’s policy starts to be vested and earned, it cannot be taken away.

In the Minnick case, the employer’s policy clearly expressed that no vacation time was earned during an employee’s first year of employment.  The plaintiff was a former employee who had only been employed for six months.  He accordingly was not paid any unused vacation in his final paycheck because he had not worked a full year.  His lawyer argued that the employer’s policy violated California law because it required employees who worked less than one year to forfeit vested vacation pay.

The employer’s vacation policy provided, in pertinent part:

In order that we all have the same understanding regarding vacation accrual, eligibility, use and payout, as well as sick days and paid holidays, I wanted to clarify [the] policy regarding each of these.

All employees earn 1 week of vacation after completion of one year service and a maximum of two weeks’ vacation after two years of service. This means that after you have completed your first anniversary with the company, you are entitled to take one week of paid vacation, and after the completion of two years of service, you will accrue two weeks paid vacation per year. This does not mean that you earn or accrue 1/12th of one week’s vacation accrual each month during your first year. You must complete one year of service with the company to be entitled to one week vacation.  (emphasis added).

The policy also provided: “Upon termination of employment, all accrued but unused vacation time (PTO) will be paid on the employees’ final check at his or her final rate of pay.”

California Labor Code Section 227.3 states that whenever an employment contract or employer policy provides for paid vacations, and the employee is terminated without having taken off his or her vested vacation time, all unused but vested vacation should be paid to him or her as wages at termination.  The California Supreme Court has previously interpreted this statute to mean that once vested, vacation pay is protected and may not be forfeited.  Vacation pay is a form of deferred compensation so while the employer is not required to provide paid vacation, if it chooses to do so, it cannot reclaim or not pay it after it has been earned.

The California Court of Appeal later held that an employer policy specifying that no vacation is earned during the first six months of employment is permissible because the policy made it clear in advance that vacation is not part of a new employee’s compensation.  A written vacation policy may legitimately prevent a new employee from earning any vacation during an initial period of employment just as a policy may also warn employees in advance that they will cease to accrue vacation time accumulated in excess of an announced maximum limit.

The Minnick case makes clear that employers need to be careful if they are going to place conditions on vacation time (whether a waiting period, a limit on how much time can be accrued, etc.), since the policy language needs to clearly and unambiguously inform the employees of any such conditions.  The policy language in Minnick was found to be lawful primarily because it specifically informed the employees in advance that they did not earn any vacation until they completed one year of service, and also that they did not earn or accrue any vacation during that first year.

Ask MSK

Q: Is it okay if our vacation policy states:  “Upon completion of one year of continuous employment, employees will receive 5 days of paid vacation and then employees will continue to receive 5 days of paid vacation annually on their anniversary date”?

A: No. The issue with the above language is that, unlike the language in Minnick, it does not specifically state that the employees do not earn or accrue any paid vacation during their first year.  The Minnick court explained that the above language does not unambiguously provide that vacation is not earned from the first day of work; rather it states that after the first year, “employees will continue to receive 5 days of paid vacation” thereby suggesting that the employer would apply the same accrual rate in the first year of employment as in later years.   Employers accordingly need to be quite specific in ensuring that their vacation policy language specifically states that vacation is earned only after completion of one year service, and also states that employees do not earn or accrue any vacation during their first year of employment.

Q: If we allow an employee to take a vacation before he or she fully earns it, would we then be required to pay the employee for the full year of paid vacation if he or she leaves before the end of that year?

A: No. An employer is allowed to “advance” the vacation benefit, thereby permitting the employee to take a paid vacation before it is fully earned, while also being allowed to only pay the employee a pro rata share (the vested portion) of the benefit if the employee leaves before the end of the year.  For example, if the employee earns five days of vacation by the end of the second year, an employer can allow the employee to take the full five days of paid vacation after three months into the year.  However, if the employee has not taken any vacation time and leaves three months into the year, upon termination, the employer is only required to pay the employee for a pro rata share (i.e., 3/12 of the five days) of the paid vacation that was earned through the date of employment.  Again, vacation policies require great clarity to avoid unintended results.