Unlimited vacation policies must be clearly spelled out
The California Court of Appeal ruled last month that employers may avoid paying departing employees the value of accrued but unused time off by adopting an “unlimited” vacation policy only if, among other things, the policy and its consequences are clearly communicated to employees from the get-go.
You remember vacations, don’t you? I’m talking about those liberating, compensated breaks from the daily grind that usually involve travel, not a depressing suspension of work.
California does not require employers to provide paid vacation leave. Employers provide paid time off for competitive reasons and because employees who take periodic vacations tend to be more productive. When he was a practicing lawyer, the great Supreme Court Justice Louis Brandeis once remarked: “I need rest. I find that I can do a year’s work in eleven months, but I can’t do it in twelve.”
The California Supreme Court has ruled that paid vacation time, provided by an employment policy or contract, “constitutes deferred wages for services rendered,” which generally vests as work is performed. Under California Labor Code section 227.3, when “an employee is terminated
without having taken off his vested vacation time, all vested vacation” must be paid “as wages at his final rate.” Use-it-or-lose-it vacation policies are illegal in California.
The accumulated value of unused vacation time may create substantial liability for an employer. Of particular concern these days, the California Labor Commissioner says a temporary furlough triggers the employer’s obligation to pay all final wages, including the value of unused vacation time, unless the furloughed employee is given a returnto-work date within the same pay period.
But may an employer avoid having to pay exiting employees for accrued vacation time by setting no limit on how much vacation an employee may take?
In Mcpherson v. EF Intercultural Foundation, Inc., EF Educational Homestay Program (EF), a nonprofit operator of educational and cultural exchange programs, asserted that its area managers were subject to an unlimited vacation policy, excusing EF from paying area managers anything for unused vacation time when they left their jobs. EF, however, never told the managers they could take unlimited vacation time or put the policy in writing. EF told the area managers only that they could take time off with pay and that they did not accrue vacation days. Area managers also were strongly discouraged, though not prohibited, from vacationing during EF’S peak season, practically limiting their available vacation time.
Moreover, EF’S policy did not define EF’S obligations or the employee’s rights under the policy. Area managers were not warned “of the consequences of failing to schedule a sufficient amount of time off, e.g., that they essentially would leave money on the table by working more hours for the same pay than those who scheduled more time off.”
The court of appeal recognized that EF did not intend its “unlimited” vacation policy to permit area managers to take vacation 365 days a year. “After all, the premise behind vacation pay is that it is deferred payment for the employee’s labor.”
But on the “particular, unusual facts” of the case, the court concluded that EF’S nominally unlimited or undefined vacation policy in practice had an implied limit of up to 20 days off. EF therefore was liable to its former area managers for the value of their unused vacation time.
The court nonetheless acknowledged the value of an appropriately drafted and administered unlimited vacation policy to employees who do the same job, but who wish to organize their time differently. “Some may work longer hours and on weekends to be able to take more frequent and longer vacations throughout the year, while others may take fewer and shorter vacations to avoid working evenings and on weekends.”
The court identified several elements a “truly unlimited time off ” policy should have. The policy must be in writing. It must clearly say paid time off is not part of an employee’s compensation, but instead perhaps part of a flexible scheduling program. The policy should identify the rights and obligations of both employee and employer and the consequences of failing to schedule time off. In practice, the policy should allow sufficient opportunity for employees to take time off, or work fewer hours in place of taking time off. And the policy should be administered fairly so that it becomes neither a de facto “use-it-orlose-it” policy nor results in such unfairness as one employee working many hours and taking minimal time off, while another works fewer hours and takes more time off.
The opportunity to take paid vacation time off that is memorable for all the right reasons will soon return. The current hiatus gives employers the opportunity to review their vacation policies to ensure compliance with California law.
Eaton is a partner with the San Diego law firm of Seltzer Caplan Mcmahon Vitek where his practice focuses on defending and advising employers. He also is an instructor at SDSU where he teaches business ethics and employment law.