By Clarice C. Liu, Esq., Published on October 18, 2017

The California Court of Appeal recently clarified and reaffirmed that an employer can establish a waiting period before the vacation time for an employee would start to accrue. However, the employer must set forth the waiting period in its Vacation Policy clearly. This article will discuss the law on the deferral of vacation accrual, as well as related issues in constructing an effective Vacation Policy.

Minnick v. Automotive Creations, Inc.

In Minnick v. Automotive Creations, Inc. (2017) 13 Cal.App. 5th 1000, 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.”

When Minnick’s employment ended in six months – before the one-year waiting time expired – he filed a lawsuit claiming that he was entitled to the vacation pay for the six-month period. The Court of Appeal affirmed the trial court’s ruling that an employer can provide a waiting period before an employee starts to earn vacation, if the employer’s policy is clearly stated. The Court also clarified that this type of deferral policy would not violate the law prohibiting forfeiture of wages.  The Court distinguished the holding from Suastez v. Plastic Dress-Up Co. (1982) 31 Cal. 3d 774, in which the California Supreme Court held that forfeiture of vested vacation was unlawful.  The Court stated in Suastez that “If vacation pay ‘vests’ as it is earned, the company’s requirement of employment on an anniversary date cannot prevent the right to pay from vesting.  At most, it is a condition subsequent which attempts to effect a forfeiture of vacation pay already vested.”  Suastez, supra, 31 Cal.3d at 781.

The Minnick case explains, however, that Suastez does not prohibit an employer from imposing a waiting period and does not require that an employer provide vacation pay vesting on the first day of employment.  Specifically, the Court reasoned that if an employer may lawfully decide not to provide paid vacation at all, then, by logical extension, an employer can also decide to provide paid vacation only after a specified waiting period.  Accordingly, the Court of Appeal held in Minnick that an employer may impose a waiting period for vacation accrual, as long as the policy so states in a clear and an unambiguous manner, as well as reasonably informs the employees when their vacation accrual will begin.

Practical Considerations.

Following the Court of Appeal’s ruling in Minnick, employers might wish to revisit its existing Vacation Policy, and to make any appropriate revisions. The following three issues are pertinent in a review of the policy.

1.   Does the employer’s Vacation Policy have a waiting period?

An employer may apply the holding in Minnick to carve out an initial employment period during which a new employee does not accrue vacation (e.g. first 3-month, 6-month, or 1-year). However, that policy must be clear and unambiguous. For illustration, the vacation policy in Minnick (as stated above) is deemed to clearly state the policy and provides sufficient notice to employees about the first year waiting period.

It is important to note that this deferral period is an exception to the otherwise broad coverage of California Labor Code section 227.3, which 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 unused vacation must be paid to the employee as wages. At the time of termination, all unused vacation must be prorated on a daily basis and must be paid at the final rate of pay in effect as of the date of the separation. If an employer fails to pay the employee’s accrued vacation, that would be construed as “forfeiture of wages” which is prohibited by law.

2.   Does the Vacation Policy provide a “cap” on vacation accrual?

While a “use it or lose it” Vacation Policy is unlawful, a policy that places a “cap” or “ceiling” on vacation pay accrual is permissible, if the cap is reasonable. Whereas a “use it or lose it” policy results in a forfeiture of accrued vacation pay, a cap simply places a limit on the amount of vacation that can accrue and be carried over to the next year. However, the cap must be “reasonable.” An employer should consult with an employment law attorney to determine whether its current cap is considered a reasonable carryover ratio and meets the requirement of the law.

3.   Should the Vacation Policy consolidate vacation with sick leave?

It is common for many employers to implement a “Paid Time Off” (PTO) policy that combines vacation days with paid sick days. While there are benefits in administering an integrated PTO plan, there are also advantages in maintaining separate accounts for vacation and sick leave for the purposes of computing accrual, pay out at the termination of employment, and more clearly delineated compliance with applicable Paid Sick Leave Ordinances (such as those enacted in San Francisco, Oakland, Emeryville, Berkeley, San Diego, and Los Angeles). Moreover, unused paid sick leave does not become wages to be paid out at the end of the employment, whereas unused vacation must be paid as wages.  Therefore, an employer might consider keeping the two accounts separate to lessen the liability at the end of an individual’s employment. The waiting period for vacation accrual under Minnick could further mitigate some of the employer’s costs. In conclusion, an employer may wish to review its current Vacation Policy to ensure that the policy is in compliance with the law as well as meet the company’s business objectives.

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The information provided in this article is intended for a general discussion of the subject matter and should not be construed as legal advice. For your specific circumstance, or inquiry about the issues addressed in this article or other employment law matters, please contact attorney Clarice Liu at (415) 288-8622 or [email protected].