If an employer in California offers their employees any kind of paid vacation time, those hours are considered a type of wages. Employers are permitted to limit how much paid time off an employee can accrue, but they cannot take it away once it is earned. Unused paid vacation hours must be paid out to the employee as owed wages at the end of the employment relationship, regardless of if they resigned or were terminated.
Are Employers Legally Obligated to Provide Vacation Pay?
Rights and regulations pertaining to vacation time are a matter of state rather than federal law. California does not require employers to offer any kind of vacation time. Rest breaks and sick leave are generally the only paid time off that California employers are legally required to provide. However, earned vacation hours are considered earned wages. Employers are permitted to decide how hours are accrued and to place a cap on total accrued hours, but they cannot take away hours once they have been earned.
Vacation Pay vs Paid Time Off
Paid time off refers to hours in which an employee is not working but is being paid. Vacation pay and sick pay are types of paid time off. Some employers only provide legally required sick pay, some provide vacation pay in addition to sick pay, and some combine vacation and sick time into one lump sum of paid time off. Regardless of how an employer designs their paid time off program, employees are entitled to any hours earned and at the end of their employment, they must be paid out for any unused paid time off they may have regardless of how their employment ended.
How is Vacation Pay / PTO Earned?
Employees who earn vacation pay accrue hours based on time worked. The employer determines how much PTO the employee can earn, but there are some regulations. In California, vacation pay accrues on a pro rata basis, meaning that the employer cannot just give the employee all of their vacation time as a lump sum at the end of the year. Instead, the time accrues weekly. If an employer offers 5 vacation days a year equaling 40 hours, the employee earns 0.769 hours per week.
How Can You Cash Out Vacation Pay?
Some employers may allow employees to cash out their unused vacation pay during their employment. Depending on the individual employer’s PTO program, this may be at the end of each year, twice a year, or even monthly. Regardless of the specific policies in place, any California employer who provides vacation pay must cash out unused hours for employees at the end of the employment relationship. This total is to be added to their final paycheck.
What Happens to My Earned and Accrued but Unused Vacation Time If I Quit or Get Terminated?
According to California Labor Code Section 227.3, employers are required to pay terminated employees the value of any earned and unused vacation time at their final rate of pay unless otherwise mandated by a collective bargaining agreement. When the employee leaves, any unused PTO is to be included with their final paycheck. If the employee is terminated or resigned with at least 72 hours prior notice, the final pay must be provided immediately. If the employee resigned with less than 72 hours prior notice, the final pay must be provided within 72 hours after they leave. If an employer does not provide final pay at the required time, they may have to pay a waiting time penalty per day missed at the employee’s daily rate of pay for up to 30 days.
How is Vacation Pay at Termination Calculated?
While vacation pay is accrued at a weekly rate on an annual basis, when calculating unused time to be cashed out, the hours are determined by a daily rate on an annual basis. For example:
- Jane Doe’s employer provides two weeks of vacation every year
- 2 weeks = 10 business days = 80 work hours
- She used up all of her vacation time at the end of 2022
- She did not use any vacation time after that
- Her last day of the job was June 30, 2023
- 1/1 through 6/30 equals 181 days
- 181 divided by 365 equals 49.59%
- 59% of 80 is 39.67
- At the end of her employment, Jane was making $15 an hour
- 67 hours multiplied by the hourly rate of $15 dollars equates to $595.00 owed
Jane is entitled to a $595.05 vacation payout added to her final paycheck.
Common Vacation Pay Considerations
The following are all important considerations when it comes to vacation pay and how it gets paid out.
Can My Employer Dictate That Vacation Isn’t Earned During the First Six Months of Employment?
The law does not prohibit employers from imposing probationary periods for new employees. This length of time often comes with different restrictions and may mean that the employee does not accrue any vacation time during that period. Probationary periods are generally either one month or three months, but they can be as long as six months or even a year depending on the employer.
Can My Employer Exclude Me from Accruing Vacation Pay if I Am a Part Time Employee?
The law does not prohibit employers from deciding to only offer vacation time to some classes of employees and not others. This means that part time or temporary workers may not be eligible for vacation time when their full time permanent coworkers are. Employers may also offer more vacation time to members of management than they do to lower level employees. If an employer does choose to offer different vacation benefits to different classes of employees, the written policy should be clear as to who is entitled to what and who is not.
Can An Employer Take Away Earned Vacation Hours?
Accrued vacation pay is considered a type of earned wages. Employers are not legally allowed to take away vacation hours that have already been earned. However, there are certain circumstances in which an employer may insist that vacation hours be utilized. If an employee misses half a day of work, the employer might require them to use their vacation time to cover the lost hours. The difference is that in that instance, the hours are being used rather than taken away.
Can My Employer Mandate That Any Unused Earned Vacation Pay Is Lost at the End of the Year?
Under California state law, once vacation time has been accrued, the employee is entitled to it as an earned wage. The employer cannot take, revoke, or force the employee to forfeit earned vacation hours. Some employers may try to institute “use it or lose it” policies regarding employees’ vacation time. However, any company policy that demands employees utilize their vacation time within a certain time frame to avoid losing it is illegal in the state of California.
Can My Employer Pay Me Out for Any Unused Vacation Time at the End of the Year?
The law does not prohibit employers from having a provision in their vacation time policy in which any unused vacation time is automatically cashed out at the end of the year. The reason why this is legal and “use it or lose it” policies are not is because the time accrued is considered earned wages. Even though the employee is losing the opportunity to take the time off from work in the form of vacation days, they are still receiving the monetary value of the hours.
Can My Employer Cap the Amount of Vacation Pay Earned?
While employees are legally entitled to any vacation time they earn, their employer is still allowed to impose certain limits and regulations on how many hours can be accrued and when they can be used. There are some employers who allow vacation time to perpetually accumulate, meaning that if an employer offers one week of vacation time a year and an employee does not use any of those hours for four or five years, they might be able to take a month long paid vacation. However, it is very common for employers to cap the maximum amount of vacation time an employee can have at once. This means that if they offer one week a year, once the employee accrues a full week, they do not accrue more until they use some of it.
How Can Employers Restrict the Use of Earned Vacation Time?
There are many different types of restrictions and regulations that an employer can work into their vacation policies. Some rules employers may impose include:
- Minimum advance notice required
- Maximum number of days taken at a time
- Vacation time must be approved
- Certain days may not be taken off
These rules may differ for different types of employees. For example, a company may allow managers to take two weeks off at a time while lower level employees are only allowed one week at a time. Employers are also allowed to deny vacation requests at their discretion.
Can an Employer Take Back Advanced Vacation Time?
There are some occasions where an employer may allow an employee to use vacation time that they have not earned yet. In the event that an employee does this and is then terminated or resigns shortly after, the employer is not permitted to deduct the value of those hours from the employee’s final check.
What Can You Do if Your Earned Vacation Pay Isn’t Paid Out Once Employment Ends?
Employers must pay the value of unused vacation hours in the employee’s final paycheck. If the employer does not compensate the employee for these hours, the employee may be able to file a claim with the Division of Labor Standards Enforcement or hire an attorney to file a lawsuit. Not only can the employee sue to recover the lost wages, but they may also be entitled to a waiting time penalty as well.
How to File a Wage Claim?
When an employee files a wage claim with the Division of Labor Standards Enforcement, they assign the claim to a Deputy Labor Commissioner who reviews the details of the situation and decides if the matter should be pursued or dismissed. If they choose to move forward, the first step is to have a conference.
Details regarding the date, time, and location of the conference will be mailed out to the involved parties. At the conference, the matter will be reviewed, and the parties will either resolve the issue, escalate the matter to a hearing, or dismiss the claim if there is not enough evidence.
A hearing consists of the involved parties and any witnesses they have giving recorded testimonies under oath. When the hearing is complete, the Labor Commissioner will issue an Order, Decision, or Award, also known as an ODA.
An undesirable ODA can be appealed in civil court. A trial will be held in which the involved parties will bring forth any evidence or witnesses they have. The court will not take into consideration anything from the recorded hearing with the Labor Commissioner. In the event that the employer is the one appealing the ODA and the employee is unable to afford representation from an attorney, the DLSE may appoint a representative for them.
Contact Mesriani If You Are Owed Vacation Time
While there are no federal or California state laws requiring employers to provide paid vacation time, if they choose to do so, employees are entitled to the hours they accrue as part of their earned wages. If the employment relationship ends and you have unused vacation hours, your employer must pay you the value of those hours with your final check. If they fail to do so, you may be able to take legal action against them to recover your owed wages and possibly a waiting time penalty. If you were recently terminated or resigned and your employer did not pay out the value of your unused vacation hours with your final paycheck, call Mesriani Law Group today for a free consultation.
Vacation Pay FAQs
Does California require PTO payout upon termination?
California Labor Code Section 227.3 mandates that employers must pay their employees the value of any unused vacation time the employee has earned at their final rate of pay at the end of the employment relationship. The only exception allowed is when a different arrangement has been laid out as part of a collective bargaining agreement.
How long does an employer have to pay you after termination in California?
If an employee is terminated or if they give at least 72 hours advance notice, the employer must provide them with their final paycheck including the value of unused vacation time on the last day of their employment. If the employee resigns without giving at least 72 hours advance notice, the employer has 72 hours in which to provide the check. If the employer does not pay the employee their final wages in the time frame required, they may be subject to waiting time penalties.
How much is vacation payout taxed in California?
Payment for accrued vacation time is considered supplemental wages. The federal income tax on supplemental wages is a flat rate of 22%, however, the rates for Medicare and Social Security withholdings do not change. California state Personal Income Tax calculates supplemental wages as regular wages when they are paid at the same time, such as a vacation payout in a final check.
