Understanding vacation pay in California

Given that employers are in the middle of vacation season, this article serves as a refresher course on California’s vacation pay rules and regulations.

What is vacation pay?

There is no requirement that employers provide vacation pay, but if this benefit is offered, it must comply with numerous rules. Vacation pay is contract between the employee and the employer; it is a form of wages. Employers can set the amount of vacation that an employee earns. However, employers must be clear about how much vacation is offered, how it accrues, and when it starts to accrue. It is legal to require that a certain period of time pass before an employee starts to accrue vacation.

Because vacation is a form of wages, the right to vacation accrues on a daily basis. Employers are free to require that employees take vacation only when they have already accrued or earned it.
Use-It-Or-Lose-It Policies are illegal

Once an employee has earned vacation, an employer cannot take it away. California law strictly prohibits Use-It-Or-Lose-It vacation policies, in which an employee loses accrued vacation that has not been used by a specific time. Reasonable caps on vacation and cash-out policies are allowed, however. See below.

Reasonable cap on vacation

Employers can establish a reasonable cap plan - meaning that once a certain level of accrued vacation is earned but not taken by the employee, no new vacation will accrue until some of the accrued vacation is taken. Once some vacation is taken, vacation must continue to accrue at the regular rate.

The cap on vacation must be reasonable. The most common caps used by employers are one-and-one-half or two times the annual accrual rate. For example, if an employee earns 40 hours of vacation per year, a reasonable cap would be 60 hours or 80.

Cash-Out Policies

Employers are free to offer employees the option to cash out their earned vacation benefits. Cash-out policies can be on an “as needed” basis or allowed only once a month or once a year. Many employers require employees to accept pay at the end of each year for vacation time that
employees accrued but did not take.

Vacation must be paid at termination

Because accrued vacation is a form of wages, an employer must pay out all accrued, unused vacation at the termination of the employment relationship. This pay out must be at the employee’s final rate of pay, regardless of the rate of pay at which the vacation time was earned.