Employers Must Ensure Unlimited Vacation Policies Are Truly Unlimited Otherwise They May Be On The Hook To Pay Out Vacation When Employment Ends
Employers Must Ensure Unlimited Vacation Policies Are Truly Unlimited Otherwise They May Be On The Hook To Pay Out Vacation When Employment Ends

Do employers have to pay out unlimited vacation time to an employee when employment ends?  According to the California Court of Appeal Second Appellate District, when an employer’s unlimited vacation policy is not truly unlimited, they must pay out unused vacation time upon termination.  (McPherson v. EF Intercultural Foundation, Inc., Case No. B290869 (Apr. 1, 2020)).

On April 1, 2020, the Second District Court of Appeal, in McPherson held that Labor Code section 227.3 applied to EF Intercultural Foundation, Inc.’s (“EF”) exempt employees because EF’s vacation policy and practice showed that despite the “unlimited” label, it was not truly an unlimited vacation policy. 

Labor Code section 227.3 provides that if vacation time is accrued and vests, it is considered earned wages that cannot be forfeited.  Unused, accrued vacation time must be paid out to an employee when their employment ends.

Unlimited vacation plans gained popularity in the technology industry as a recruitment tool and in the name of work/life balance.  In a world where exempt employees access their cellular phones to take short calls or respond to emails during vacation, the desire to track and enforce vacation limits has waned, as exempt employees are entitled to their salary whenever they perform some work during a workweek. 

Under an unlimited vacation policy, an employee does not earn specific amounts of vacation.  Instead, the employee may take time off with pay whenever desired, and therefore, theoretically, there is no obligation on the employer to pay out any vacation pay when employment ends because vacation time never accrued.  California courts had not previously analyzed unlimited vacation plans.

In McPherson, three exempt employees sued EF for failure to pay vacation wages upon termination.  EF argued that its written vacation policy did not apply to the plaintiffs and that it had an unwritten unlimited vacation policy for exempt employees including the plaintiffs.  Therefore EF was not obligated to pay any unused vacation time under Labor Code section 227.3. 

The trial court disagreed.   The trial court found that EF’s practice of approving at least 20 days of vacation created the inference that vacation time vests for EF’s exempt employees.   Further, the trial court considered EF’s payment of accrued vacation benefits to another area manager, the same position as the plaintiffs, when she separated from EF in 2014, as evidence that vacation time vested for exempt employees.

The Court of Appeal affirmed the trial court’s ruling and concluded that because of the particular set of facts in McPherson, that Labor Code section 227.3 applied to EF because its vacation policy was neither unlimited in practice nor conveyed as unlimited.   EF failed to set out its purported unlimited vacation policy – or any limitations it imposed on earning vacation wages – in a clear, express writing. 

The court emphasized that its decision did not mean that all unlimited paid time off policies give rise to an obligation to pay unused vacation upon termination.  Rather, the court stated, “[f]lexible work arrangements and unlimited paid vacation policies may be of considerable benefit to employees and to the employers who want to recruit and retain those employees.  Employees and employers are free to contract for unlimited paid vacation, consistent with the Labor Code and governing case law.”

What this means for California employers

California employers utilizing unlimited vacation policies must ensure that its unlimited vacation policy does not succumb to the failures outlined in this case.  Vacation plans, whether unlimited or traditional, should be set forth in a clear, detailed, written policy.  Unlimited policies should clearly establish that vacation time is not accrued and not paid out upon termination.  Employers should administer the time off consistent with such policy.  Employers should also consider restricting unlimited time off plans to exempt employees.  

Employers with questions regarding employee vacation policies, including the use of unlimited vacation policies, may contact the authors or their usual employment law counsel at Atkinson, Andelson, Loya, Ruud & Romo.

This AALRR publication is intended for informational purposes only and should not be relied upon in reaching a conclusion in a particular area of law. Applicability of the legal principles discussed may differ substantially in individual situations. Receipt of this or any other AALRR presentation/publication does not create an attorney-client relationship. The Firm is not responsible for inadvertent errors that may occur in the publishing process.

©2020 Atkinson, Andelson, Loya, Ruud & Romo

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