With summer fast approaching, it’s a good time to review and update company vacation and personal time off (PTO) policies to ensure compliance with California law. The following is a brief discussion of the laws that apply to vacation and PTO in California.

Vacation versus PTO Policy

As a preliminary matter, employers are not required to have a vacation or PTO policy. However, once they do have such a policy, employers must comply with applicable California requirements. There are two approaches when it comes to providing paid time off to employees. Some employers elect to provide a stand-alone vacation policy which only applies to vacation time taken by employees. Other employers elect to instead have a PTO policy which bundles all available paid time off together, including paid sick leave and personal days. Note that if the company elects to have a PTO policy, then the company must ensure their PTO policy complies with California paid sick leave law. Click here to read our article discussing California paid sick leave. Also, paid sick leave that is bundled into a PTO policy is considered wages and must be paid out to employees when their employment separates, which is not the case for stand-alone paid sick leave policies.

Vesting and Placing Caps on Vacation Pay

Employers who provide vacation to their employees typically provide 1-2 weeks each year, with some employers allowing even more time for more tenured employees. Some employers elect to have vacation policies that provide unlimited vacation. However, before implementing such a policy an employer should consult with experienced employment counsel. Ultimately, the amount of vacation or PTO to be provided is at the discretion of the employer. Regardless of the amount of vacation time provided, employers can either front load it all at the beginning of each year or the employee’s anniversary date with the company, or it can be vested based upon hours, weeks or months worked in a given year. There are pros and cons to both approaches and employers should consult with employment counsel to help decide which approach is best. (Note that if a PTO policy is used, then employers must allow employees to vest in PTO at a rate of one hour for every 30 hours worked by the employee to comply with California Paid Sick Leave. Also the available PTO must be reflected in the employees’ pay stubs.)

Once vacation or PTO is vested, it is considered wages and cannot be taken away by employers. However, employers can place reasonable caps on vested vacation and PTO. While there is no specific cap on vacation under California law, best practices is to permit vesting and capping vacation at one and one half times the annual vacation or PTO provided each year. Once the cap is reached by the employee, employers can assert that no further vacation or PTO can be accrued until the employee uses their allotted time such that their total accrued leave dips below the cap. Alternatively, employers can elect to simply pay out the accrued vacation/PTO at the end of the year rather than have it continue to accrue into the following year.

Employers Can Decide When Vacation/PTO Time Can Be Taken

With the exception of using vacation pay or PTO for protected leaves of absences discussed below, employers still may provide reasonable limits on when employees can take their time off work. In determining whether employers will grant a specific vacation request, employers can take into consideration the work demands at the time the employee wants to take their vacation, including if other employees have already requested the same dates off of work. While an employer can deny the timing of taking vacation on a specific date or period of time, employers should generally work with employees to determine the best time to take their vacation/PTO.

Applying Vacation Pay and PTO to Personal and Other Types of Protected Leave

California law permits employees to elect to use vacation pay and PTO (and Paid Sick Leave) to apply to their protected leaves including Pregnancy Disability Leave, California Family Rights Act and Family Medical Leave Act and disability leave. However, employers cannot require that vacation or PTO be used by the employee to such leaves of absence. Note that employers can also have a separate personal unpaid leave policy that employees can use at the discretion of the employer.

Pay Out of Vacation/PTO Pay

As discussed above, accrued vacation and PTO pay is considered wages. Therefore, it must be paid out when the employee separates their employment along with all other final wages pursuant to Labor Code section 201. Also, as discussed above, rather than permitting accrual of vacation and PTO time from year to year, employers can pay out accrued vacation pay at the end of the year.

Ensure your organization stays ahead of the curve by reviewing and updating your vacation or PTO policies to comply with California regulations. If you have any questions or need assistance in revamping your policies, don’t hesitate to contact our employment attorney Scott Liner at [email protected] or call us to set up a consultation at 310-545-7700 to help. Taking proactive steps today can prevent headaches tomorrow.

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_{Please note that this article is for informational purposes only and should not be considered legal advice. It is recommended to consult with an attorney for specific legal guidance pertaining to your business and its practices.}