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Get rid of your “use it or lose it” vacation policy

Even though a “use it or lose it” vacation policy has been illegal in California for years, having such a policy made the California Chamber of Commerce’s top ten list of things employers do to get sued (released on July 19). This implies that some employers still have such policies in place and are being sued as a result. If you are an employer, here is some information about vacation policies that will hopefully help you stay out of court.

While California employers are not required to provide paid (or unpaid) vacation time to their employees, if you do provide paid vacation, there are some rules you must adhere to in addition to not having a “use it or lose it” policy. Because earned vacation time is considered to be wages, vacation time is earned as labor is performed (for example, if an employee is entitled to 10 days of vacation per year, he will have earned 5 vacation days after 6 months of employment). Also, because vacation time is considered to be wages, employers must pay any unused vacation upon termination of employment (unless otherwise stipulated by a collective bargaining agreement).

Other than that, according to the Division of Labor Standards Enforcement (the government agency that enforces labor codes), employers are mostly allowed to make up their own rules regarding vacation, such as determining:
• When vacation time begins to accrue. For example, employers may delay vacation time accrual until the employee has been with the company for 3 months, 6 months, 12 months, etc.
• How vacation time is accrued (by the day, the week, the pay period, or some other period basis). However, regardless of how it is accrued, the calculation of vacation pay for terminating employees 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.
• How much vacation time is accrued (40 hours for the first – fifth years of employment, 80 hours for the sixth – tenth years of employment, etc.). Additionally, employers may put a limit or “cap” on how much vacation time is accrued.
• Who receives vacation time. For example, employers may provide vacation time to full-time employees but not provide it to part-time, temporary, or probationary employees.
• When and how much vacation may be taken at a time. Employers may deny a vacation request if the time off would interfere with business operations
• Whether to pay employees for unused vacation while still employed. In order to manage its vacation pay responsibilities, some employers pay employees their unused vacation wages at certain intervals, such as the end of the year.
• Whether to combine vacation time, sick leave, and holidays into a paid time off (PTO) program. While employers are not required to provide paid sick leave or paid holidays, PTO programs are subject to the same requirements as vacation policies, thus PTO can not be taken away once given and must be paid out at time of termination.
• Whether to allow employees to take vacation time before it is accrued. Employers should take note that they are not allowed to deduct “advanced” vacation from an employee’s final paycheck should termination take place before the vacation time is accrued.

Summertime is usually vacation time. Knowing the laws regarding vacation policies will hopefully make the living easier for everyone involved.

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Disclaimer: The information and resources provided herein are not a substitute for experienced legal counsel and does not constitute legal advice or attempt to address the numerous factual issues that inevitably arise in any employment-related dispute. Although this information attempts to cover some major recent developments, it is not all-inclusive, and any recommendations are based upon HR best practices and procedures. We recommend you consult an attorney for legal guidance.

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