Last updated: May 2018

A recent California case (Minnick v. Automotive Creations, Inc.) ruled that an employee who worked for less than one full year was not entitled to vacation pay at the time of termination since the employer had a clear and unambiguous policy stating that employees do not earn or accrue vacation until after the first year of employment. While not inconsistent with the California Labor Commissioner’s previous positions on vacation waiting periods, this case does open up some additional, albeit a bit murky, possibilities for the design of a complaint vacation policy.

First a bit of background – nothing under California (or federal) law requires an employer to provide paid vacation to its employees. However, once a company decides to offer such benefits(whether called vacation, PTO or Personal Days – the name does not matter), the administration of these plans is highly regulated. California law views paid vacation as part of an employee’s wages as opposed to a gift or perk. Like any other compensation, once earned, vacation benefits legally cannot be forfeited. Existing law also provides that an employee’s right to vacation benefits is earned as the employee performs work, and as such, any unpaid portion of the employee’s vacation is due to the employee (pro-rated based on actual number of days worked) as part of wages payable upon termination. For example, if an employee is entitled to one week of vacation after 1 year of service, the right to that 1 week accrues as time goes by, so if the employee leaves after 6 months of service, half of the 1 week of vacation would be due and payable at the time of termination. That being the case, the Labor Commissioner has had a long-standing position that employers may impose waiting periods before new employees can begin accruing vacation – having approved waiting periods as long as 6 months or even a year. The waiting period, however, may not be a subterfuge. For example, a plan that provides no vacation in year 1, 4 weeks in year 2, and then 2 weeks in years 3 and onward would be viewed as an illegal plan since the Labor Commission feels that 2 of the 4 weeks earned in year 2 are actually earned in year 1. A plan that provides for no vacation in year 1, 2 weeks in year 2, and 3 weeks in years 3 would be considered legal. More typically, employers tend to impose 30, 60, or even 90-day initial waiting periods before vacation starts to accrue.

The Minnick case shed some additional light on an employer’s ability to enforce vacation accrual waiting periods. The court ruled that an employee who terminated employment prior to working less than one year was not entitled to any pro-rated vacation time because the company had a clear, unambiguous, and lawful policy that stated that employees do not start to earn or accrue vacation until after their first year of employment.

The Company’s policy read as follows:

All employees earn 1 week of vacation after completion of one year of 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 of vacation.

While we would agree that the policy is very clear about the employee not being entitled to accrue any vacation during the initial year, we find the remainder of it is still confusing. It falsely leads one to believe that the court approved vacation benefits that are granted in lump sums which is not the case. It appears that the employer intended (and the court agreed) that the one week the employee can take after his/her first anniversary is not a lump sum vesting but actually an advance on the 2 weeks that can be accrued during the second year of employment. The employee argued that the fact that “receiving” 1 week of vacation at the beginning of his second year meant that this was already a vested benefit. The court disagreed saying that employers are permitted to “front-load” vacation benefits, permitting the employee to take 1 week of vacation before it was actually earned. They noted that if an employee then left during his/her second year, he/she would only be entitled to a pro-rated share (“the vested portion”) of that year’s 2-week benefit.

While this case certainly brings more flexibility to employers in how they design their vacation policies, we would not recommend implementing something written like this employer’s policy. To achieve the results they were after, we’d suggest having worded the policy more like this:

All employees are eligible to begin accruing vacation benefits after completion of one year of service. Vacation benefits accrue at the rate of 3.08 hours per bi-weekly pay period worked which equates to a maximum of 2 weeks of vacation per year of service. Despite the fact that accruals do not begin until your 1st anniversary, upon completion of 1 year of service you will be allowed to take 1 week of vacation as an advance on the vacation to be earned during your second year with the company. Going forward you will be allowed to accrue no more than 2 weeks of vacation for each year worked.

Vacation accruals that grant a certain number of hours of vacation to employees per pay period or per hour worked are the easiest to understand and to track. These types of accruals can be set up in most payroll systems, which eliminates the ambiguity over how much vacation is owed at what point in time. Keep in mind that just because accrued vacation is on the books, an employer does not have to permit employees to take time off. Vacation scheduling is at the discretion of the employer. Despite the policy in this case having been declared legal by the court, having a policy that describes benefits in lump sum amounts, when by law the employee accrues the rights to the benefit as work is performed, is confusing for everyone and opens up the door to claims of impropriety.

The case further underscores for employers the need to have written vacation policies that are clear, unambiguous, and legally compliant; and to ensure that such policies are consistently followed in practice. With new light on options for employers, this is a good time to audit and re-examine your company’s vacation, PTO, and other paid time off policies.

With many years of experience designing, documenting, and administering vacation/paid time off plans, at Vantaggio we’re here to help. Please give us a call.

For more information, please contact us.

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