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Unlimited Vacation Policies Present Potential Pitfalls for California Employers

May 11, 2020 Articles

As unlimited vacation policies increase in popularity, California employers must be careful to avoid legal pitfalls in drafting and implementation. In the first California appellate decision to address unlimited vacation policies, the court held that the employer’s purported unlimited vacation policy triggered California Labor Code §227.3, entitling employees to a payout for the value of the accrued vacation at termination.

In addition to triggering vacation pay, unlimited vacation policies present challenges related to unpaid leaves and may render employers more susceptible to discrimination claims. When drafting an unlimited vacation policy, employers should think carefully about how such a policy would interact with the employer’s leave of absence and disability accommodation policies. Ultimately, any employer seeking to adopt an unlimited vacation policy should consider whether the benefits outweigh the legal risks.

Unlimited Vacation Policies May Still Require Accrued Vacation Payouts at Termination

California Labor Code §227.3 states that “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. . . .” Under a traditional policy where the vacation accrues, employers must therefore pay employees for all accrued but unused vacation at termination.

Proponents of unlimited vacation policies argue that since vacation does not “vest” under an unlimited policy, no payment is required at termination under Section 227.3. Employee advocates have argued that unlimited vacation policies are a subterfuge to avoid paying out vacation at termination.

While no court has addressed this issue, a recent California Court of Appeal decision held that certain purported unlimited vacation policies entitle employees to vacation pay. In McPherson v. EF Intercultural Foundations, Inc., 47 Cal. App. 5th 243 (Apr. 1 2020), the employer claimed to have an unwritten unlimited vacation policy. But because the policy was neither clearly communicated to employees nor unlimited in practice, the court affirmed the trial court’s award of vacation pay. The court found that the policy had an implied limit, due both to the substantial workload precluding significant vacation time and the employer’s expectation and employees’ practice of only using an amount typical to corporate employees. The court calculated the award based on its finding that the employees effectively accrued twenty vacation days annually.

Although the court’s holding was explicitly limited to its facts, the court identified elements of an unlimited vacation policy that could possibly protect an employer from potential liability under Section 227.3, including that the policy:

  1. Is in writing;
  2. Clearly provides that employees’ ability to take paid time off is not a form of additional wages for services performed, but instead part of the employer’s promise to provide a flexible work schedule – including employees’ ability to decide when and how much time to take off;
  3. Spells out the rights and obligations of both the employee and employer and the consequences of failing to schedule time off;
  4. In practice allows sufficient opportunity for employees to take time off, or work fewer hours in lieu of taking time off; and
  5. Is administered fairly so that it neither becomes a de facto “use it or lose it policy” nor results in inequities, such as where one employee works many hours, taking minimal time off, and another works fewer hours and takes more time off.

The final element may present challenges as it applies to exempt employees with varying work demands. Employers with unlimited vacation policies should therefore work with counsel to consider these factors when developing their policies.

Finally, while the court suggested that true unlimited vacation policies may not trigger Section 227.3, it did not directly address the issue. Accordingly, even unlimited vacation policies meeting the criteria above may carry some risk of claims under Section 227.3.

Coordinating Unlimited Time Off with Unpaid Leaves

In addition to potential Section 227.3 claims, unlimited vacation policies can pose difficulties when employees seek leave for a disability or medical issue. California employees are entitled to unpaid leaves under various laws, including the Family and Medical Leave Act and California Family Rights Act. These laws generally require equal treatment of employees taking protected leaves and those taking unprotected leaves. The laws also typically allow employees to utilize paid time off to cover a portion of their leave.

Employers with an unlimited vacation policy face dilemmas with no clear solutions. Employers should proactively consider how an unlimited vacation policy will apply to long-term medical- or disability-related leaves, including the maximum length of any paid leave and under what circumstances employees will be required to take unpaid leave. For example, an employer who allows employees to take significant periods of paid time off for travel and vacation could face legal exposure if it requires employees to take unpaid leave for similar periods of medical- or disability-related time off.

Discriminatory Application

Lastly, employers with unlimited vacation policies must be sure to apply the policy equally to classes of employees. As with any policy involving employer discretion, unequal application can give rise to a discrimination claim.

Significance

Before implementing an unlimited vacation policy, employers should think carefully about potential legal risks and how the policy will be applied. This requires consideration of the factors in the McPherson decision, as well as implications for medical- and disability-related leaves. Employers who are considering implementing such a policy should consult with legal counsel before proceeding.

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