Court Clarifies and Confirms Vacation Pay Rules

In the recent decision in Owen v. Macy’s Inc. ___ Cal. App. 4th ___ (June 30, 2009), the Court has provided guidance to California employer’s regarding vacation pay rules. In Owen, the Court held that an employer is not required to provide employees with any vacation pay. Further, the Court held that even when an employer provides vacation pay, the employer may provide that new employees earn no vacation pay during an initial period of employment.

In the Owen case, the employer’s handbook specified that employees earned no vacation pay during their initial six (6) months of employment. When the plaintiff terminated her employment, the plaintiff filed suit claiming that the employer’s vacation policy was unlawful. Reviewing the Labor Code and the case law, the Court found that the employer’s vacation policy was lawful and noted the following points:

• Labor Code section 227.3 does not require that an employer provide employees with any paid vacation at all, contractually, or as a matter of policy, as part of the employee compensation package.
• An employer may offer its employees no vacation time, if the employer so chooses.
• Vacation pay vests as it is earned; however an employer determines when vacation pay is earned and thus may provide that no vacation pay is earned during an initial period of employment.
• A “no additional accrual" vacation policy is permissible. Just as an employer may determine that no vacation is earned during an initial period of employment, an employer may provide that no additional vacation pay is earned after an employee has accumulated a set amount of vacation time.
• A “use it or lose it” vacation policy is impermissible, i.e. employees can not forfeit vested vacation pay.
• Vested vacation pay is payable upon the termination of an employee’s employment and is payable at the employee’s then current rate of compensation.

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If you have any questions regarding this alert, please contact:

Charles E. Noneman at 310.284.2236 or cnoneman@coxcastle.com  
Herbert J. Klein at 310.284.2202 or hklein@coxcastle.com  
Dwayne P. McKenzie at 310.284.2279 or dmckenzie@coxcastle.com  

The Labor and Employment Group at Cox, Castle & Nicholson LLP provides counseling to employers regarding the structuring of employee benefits packages, including vacation and sick leave policies, and counsels employers with respect to compliance with virtually all state and federal laws governing employee fringe benefits, including pension and health and welfare benefits.

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