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California Court Clarifies When Unused Paid Vacation Must Be Paid Out At Termination

Published by on November 20, 2017

A California Court of Appeal ruled that an employee is not entitled to payment for unused vacation time if vacation time is unvested due to a required waiting period.

The California Court of Appeal recently held that employers are not obligated to pay their employees at termination for unvested vacation due to a required waiting period. The Private Attorney General Act class action, Minnick v. Automotive Creations Inc., 13 Cal. App. 5th 1000 (2017), was brought by a former employee of Automotive Creations, who alleged that the company’s vacation policy violated California law. Automotive Creations’ vacation policy stated that employees earn “1 week of vacation after completion of one year service.” The language of the policy made clear that only after an employee’s one year anniversary with the company would the employee be entitled to vacation and that employees do not “accrue 1/12th of one week’s vacation” each month during their first year. Minnick’s employment with Automotive Creations ended after six months and he did not receive a pro-rata payment for vacation time. Minnick alleged that this violated Section 227.3 of the California Labor Code, which requires all vested vacation be paid upon termination.

At the trial court, Automotive Creations argued that Minnick had not any accrued vacation time because he left the company in less than a year and had thus not accrued any vacation. Automotive Creations further asserted that Minnick needed to prove its vacation policy was unlawful in order to succeed on his claim. The trial court agreed and dismissed Minnick’s complaint. Minnick appealed.

The California Court of Appeal’s analysis centered on two controlling cases: Suastez v. Plastic Dress-Up Co., 31 Cal.3d 774 (1982), and Owen v. Macy’s, Inc., 175 Cal. App. 4th 462 (2009). In Suastez, the California Supreme Court considered the lawfulness of an employer’s vacation policy. The vacation policy in Suastez granted employees “one week of vacation in the First Year; two weeks of vacation in the Second Year; and three weeks in the Fifth Year” with eligibility for vacation accruing “on the employee’s anniversary date.” After five years and nine months with the company, the Suastez plaintiff sought pro rata compensation of his unused nine months-worth of vacation pay from his fifth anniversary when he left. The court recognized that employers are not required to offer paid vacation time but if they do, it amounts to “deferred compensation” which, once offered, cannot be forfeited. The court reasoned that per the language of the vacation policy, employees accrued vacation time over the year prior to their anniversary date. Hence, conditioning payment of vested vacation time on the employee remaining with the company until the anniversary created the possibility of an employee forfeiting vacation time. Such a policy is unlawful under California law.

In Owen, an employer’s instituted a six-month waiting period prior to the accrual of vacation time. The Owen court expressly rejected the plaintiff’s argument that Suastez required “an employee be credited with vacation time starting from the very first day of employment.” The court noted that the employer’s policy in Suastez did not mandate a waiting period. In contrast, the vacation policy in Owen clearly denoted a six-month waiting period. In fact, the Owen employer made it clear that as a matter of policy, employees would not accrue “vacation pay . . . for the first six months.” Hence, vacation time did not immediately accrue. Accordingly, the Owen plaintiff had no vested vacation time from his first six months of employment.

Given the aforementioned cases, the Minnick court held that Automotive Creations’ waiting period was lawful and that vacation time under the policy did not accrue during the identified waiting period. The Minnick court emphasized that in the same manner an “employer may lawfully decide it will not provide paid vacation,” employers may also decide to only “provide paid vacation after a specified waiting period.” Concurrently, the court affirmed that an employee is entitled to payment only when vacation time is actually vested to the employee outside of any waiting period. Thus, the court held the trial court properly dismissed Minnick’s claims because Automotive Creations’ waiting period and explicit non-vesting language did not violate California law.

Welter Insight

Minnick reaffirms the importance of maintaining a well-written and clear vacation policy. It is important to note that the court’s favorable employer ruling relied heavily on the wording of the employer’s policy. Therefore, California employers should review their vacation policies and, if consistent with their intent, include explicit language indicating that no vacation time is accrued during any instituted waiting period.

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