Written by Jeremy Mittman

Why This Matters

Over the last several years, some employers have chosen to adopt unlimited vacation time policies for their employees.  Unlike more traditional vacation policies, under unlimited vacation policies, vacation time does not vest.  Rather, employees can take as much vacation time as they’d like (generally within reason and subject to business needs).  One of the benefits of these policies for employers is that, while vested vacation time is considered wages and must be paid out upon termination of employment, because unlimited vacation time does not vest, there is nothing to pay out when employment ends.

Recently, in McPherson v. EF Intercultural Foundation, Inc., the California Court of Appeal ruled that, while under the facts of the particular case, the employer’s “unlimited” vacation time policy was not valid (and so the actual vacation days taken by plaintiffs should be accrued and paid out upon termination), employers may have “truly unlimited time off policies” if they are provided to employees in writing and meet certain criteria set forth below.

While the Court of Appeal’s analysis and apparent approval of such a policy is not necessarily binding (the Court stated the criteria as dicta), it is important that employers consider the factors set forth by the Court in drafting their own policies.  Employers with unlimited vacation or paid time off policies should consult with employment counsel to confirm these policies are in line with the Court’s guidance.

Background

Under California Labor Code section 227.3, “whenever a[n] . . . employer policy provides for paid vacations, [upon an employee’s termination,] all vested vacation shall be paid to him as wages at his final rate in accordance with such . . . employer policy respecting eligibility or time served.”  The California Supreme Court has held that vacation time vests proportionally to the time worked on the job as a year progresses.  Suastez v. Plastic Dress Up Co., 31 Cal. 3d 774 (1982).

In McPherson, the employer had an unwritten policy whereby the three plaintiffs received paid vacations; however, plaintiffs were not provided with any specific amount of annual vacation time that was part of their compensation, and instead vacation time was approved without being tracked.  The plaintiffs testified that, through their combined total of 40 work-years, they actually were approved to take between one and twenty vacation days per year.  The trial court held that, despite the employer’s unlimited vacation policy, plaintiffs accrued up to 20 days per year of vacation time and the employer was required to pay out that time upon termination.

The Court of Appeal largely affirmed the lower court’s decision “based on the particular facts of this case,” but the applicability of the holding is limited because the court did “not decide whether vacation wages are earned under an unlimited policy—whether ‘uncapped time off equate[s] to vested vacation’’—as that is not the policy here.” The policy at issue was not in writing and the employer apparently never told plaintiffs that it had an “unlimited” vacation policy or that their paid time off was not part of their compensation.

The Court of Appeal noted that “truly unlimited time off policies” might not violate Section 227.3 provided such policies are presented in writing and satisfy the following requirements:

1. clearly provide that employees’ ability to take paid time off is not a form of additional wages for services performed, but perhaps part of the employer’s promise to provide a flexible work schedule— including employees’ ability to decide when and how much time to take off;
2. spell out the rights and obligations of both employee and employer and the consequences of failing to schedule time off;
3. in practice allow sufficient opportunity for employees to take time off, or work fewer hours in lieu of taking time off; and
4. are administered fairly so that such a policy neither becomes a de facto “use it or lose it policy” nor results in inequities, such as where one employee works many hours, taking minimal time off, and another works fewer hours and takes more time off.