California Court Confirms that Vacation Accrual Can Be Restricted for New Employees

Employers seeking to limit the vacation accrual of new employees just received some welcome news.  The California Court of Appeal reaffirmed that California law does not prohibit employers from imposing a waiting period before vacation time begins to accrue, so long as the employer’s policy is clearly stated. Minnick v. Automotive Creations, Inc., No. D070555 (Cal. Ct. App. 4th Jul. 28, 2017).

California Vacation Pay Statute and Case Law

California law requires employers to compensate employees for vested, unused vacation time at the time of termination. The California Labor Code provides, “Unless otherwise prohibited by a collective-bargaining agreement, whenever a contract of employment or employer policy provides for paid vacations, and an employee is terminated without having taken off his vested vacation time, all vested vacation shall be paid to him as wages at his final rate in accordance with such contract or of employment or employer policy respecting eligibility or time served; provided, however, that an employment contract or employer policy shall not provide for forfeiture of vested vacation time upon termination ….” Cal. Lab. Code § 227.3. The California Supreme Court has interpreted this provision to mean that once vested, the right to vacation pay is protected and may not be forfeited. Suastez v. Plastic Dress-Up Co., 31 Cal. 3d 774, 779 (1982).

After the California Supreme Court’s Suastez decision, the California Court of Appeal held that an employer’s policy may provide a waiting period before the employee becomes eligible to earn paid vacation time. Owen v. Macy’s Inc., 175 Cal. App. 4th 462 (2009). The Owen court determined that Suastez’s rule against forfeiture of vested vacation pay does not prohibit such a policy, but that the policy must be clear in order to be enforceable. Id.

The Court of Appeal’s Analysis in Minnick

In Minnick, the plaintiff challenged his joint employers’ vacation policy which provided a one-year waiting period before vacation time would begin to accrue. The policy stated:

“All employees earn 1 week of 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 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 vacation.”

The Minnick plaintiff worked for the employers for six months and, consistent with the policy, the employers did not pay the plaintiff any vacation wages upon termination because he was employed for less than one year. The plaintiff then sued the joint employers to recover vacation wages, arguing that (1) the employers’ policy unlawfully contracted around the rule against forfeiture of vacation wages, and (2) alternatively, the employers’ policy did not clearly provide for a waiting period. The trial court sustained the employers’ demurrer without leave to amend and entered judgment in the employers’ favor, and the plaintiff appealed.

The Court of Appeal affirmed the trial court’s ruling and reasoned that because an employer may lawfully decide not to provide paid vacation at all, it can also decide to provide paid vacation only after a specified waiting period. The court rejected the plaintiff’s contention that the policy constituted an unlawful forfeiture of vacation wages, holding that “[a]n employer does not ‘contract around’ the forfeiture prohibition by providing that an employee does not begin to earn vacation pay until a certain date.” The Court of Appeal agreed with the Owen holding, and said nothing in Suastez “prohibit[s] an employer from imposing a waiting period or require[s] that an employer provide vacation pay vesting on day one of the employment.” (emphasis in original).

In rejecting the plaintiff’s argument that the employers’ policy was unclear, the Court of Appeal found that the plain meaning of the employers’ vacation policy provided for a waiting period and did not constitute a forfeiture policy. The court highlighted the policy’s statement that employees “must complete one year of service with the company to be entitled to one week vacation,” and found that the example included in the policy made clear that an employee is not entitled to a pro rata amount of vacation pay during the first year.

Conclusion

The California Court of Appeal has now twice made clear that nothing in the California Labor Code prohibits a policy which provides for a waiting period before an employee begins to accrue paid vacation. Once an employee becomes eligible to earn vacation benefits, however, he or she is entitled to payment for unused vacation upon separation and cannot forfeit this entitlement. Thus, to ensure compliance with California Labor Code § 227.3, any policy providing for a waiting period before vacation accrual should be clear and should not purport to forfeit vacation time that has already accrued.