Policy Resulting in No Accrual of Vacation Pay During Initial Year OK'd

An employee who worked less than one year was not entitled to vacation pay under a policy providing that employees don't start to earn vacation time until after their first year, the California Court of Appeal ruled. 

The policy was lawful, the court ruled, and when the worker left the company, he didn't have any vested or accrued vacation pay and therefore was not owed any vacation wages.

Nathan Minnick worked one job for joint employers, Automobile Creations Inc. and Dynamic Auto Images Inc., from June 2014 through December 2014. The two companies operate automobile-related businesses throughout California. Consistent with their written vacation policy, the companies did not pay Minnick any vacation wages in his final paycheck because he had been employed for less than one year.

Minnick sued the companies, claiming their vacation policy violated state law because it required employees who worked for less than one year to forfeit vested vacation pay. The trial court dismissed the lawsuit before trial, and Minnick appealed.

Policy Is Legal

The companies' written vacation policy stated in part:

"All employees earn 1 week of vacation after completion of one-year service and a maximum of two weeks' vacation after two years of service. This means that after you have completed your first anniversary with the company, you are entitled to take one week of paid vacation, and after the completion of two years of service, you will accrue two weeks paid vacation per year. This does not mean that you earn or accrue 1/12th of one week's vacation accrual each month during your first year. You must complete one year of service with the company to be entitled to one-week vacation."

The policy also provided: "Upon termination of employment, all accrued but unused vacation time (PTO) will be paid on the employees' final check at his or her final rate of pay."

Minnick's lawsuit claimed that the failure to pay vacation wages violated Section 227.3 of the California Labor Code, which states that whenever an employer policy provides for paid vacations, and the employee leaves the company without having taken his or her vested vacation time, all vested vacation should be paid to him or her as wages at termination. Termination may be voluntary, as was the case with Minnick, or involuntary.

[SHRM members-only toolkit: Coordinating Leaves of Absence]

Interpreting this statute more than 30 years ago, the California Supreme Court held that once an employee is vested, the right to vacation pay is protected and may not be forfeited (Suastez v. Plastic DressUp Co. (1982) 31 Cal.3d 774). The high court additionally held that vacation pay is vested as it is "earned." Therefore, although California law does not require an employer to provide its employees with any paid vacation, if an employer chooses to include paid vacation as a portion of the employee's compensation, the employer is not free to reclaim it after it has been earned.  

However, a 2009 Court of Appeal case (Owen v. Macy's Inc., 175 Cal.App.4th 462) clarified that the employer may determine whether vacation begins to accrue immediately upon hire or only after a waiting period. That case concluded that a company policy specifying that no vacation is earned during the first six months of employment was permissible under California law.

The two earlier cases, read together, the appellate court said, instruct that once an employee becomes eligible to earn vacation benefits, he or she is entitled to payment for unused vacation upon separation. And both confirmed that this benefit is vested and cannot be taken away by contract. But the employer may provide a waiting period before the employee becomes eligible to earn vacation, and if the employer's policy is clearly stated, the waiting period policy is enforceable.

"An employer may lawfully decide it will not provide paid vacation. By logical extension, an employer can properly decide it will provide paid vacation after a specified waiting period," the court said, affirming the lower court's dismissal of the lawsuit.

Minnick v. Automotive Creations Inc., Calif. Ct. App., No. D070555 (July 28, 2017).

Professional Pointer: This case illustrates how important it is to state all vacation policies as clearly and completely as possible. The explicit language used here made it impossible for the employee to argue successfully that the one week of vacation began to accrue before the end of the year.

Joanne Deschenaux, J.D., is a freelance writer in Annapolis, Md.

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