What are the rules in California regarding vacation or paid time off (PTO) policies?

California has no legal requirement for an employer to provide its employees with either paid or unpaid vacation time. However, if an employer does have an established policy, practice or agreement to provide paid vacation, then certain restrictions are placed on the employer as to how it fulfills its obligation to provide vacation pay.

In California, paid vacation is a form of wages, and it is earned as labor is performed. For example, if an employee is entitled to two weeks (10 workdays) of vacation per year, after six months of work he or she will have earned five days of vacation.

An employer's vacation plan may provide for the earning of vacation benefits by the day, by the week, by the pay period or by some other period of time. After vacation leave is earned, it cannot be taken away from the employee, meaning an employer's policy may not stipulate that at the end of the year any unused vacation time would be forfeited. An employer may, however, place a reasonable cap on vacation benefits to prevent an employee from earning vacation in excess of a certain number of hours.

Similarly, the Division of Labor Standards Enforcement (DLSE) policy does not prohibit an employer from including a waiting period at the beginning of the employment relationship during which an employee does not earn any vacation benefits. This period of time could apply to a probationary or introductory period and may even apply to the whole first year of employment. Such a provision in a vacation plan will only be recognized, however, if it is not an attempt to evade the law and, in fact, no vacation is implicitly earned or accrued during that first year or other period.

An employer also has the right to manage its vacation pay responsibilities, for instance, by controlling when vacation may be taken and the amount of vacation that may be taken at any particular time. Vacation time may be subject to scheduling and advance notice requirements. Employers may also provide blackout periods in which vacation time may not be used at all.

A PTO plan or policy does not allow an employer to circumvent the law with respect to vacations. When an employer replaces its separate arrangements for vacation and sick leave with a program whereby employees are granted a certain number of paid days off each year to be used for any purpose, including vacation and sick leave, the same rules for vacation policies apply to those days. Thus, for example, PTO is earned on a day-by-day basis; vested PTO days cannot be forfeited; the number of earned and accrued PTO days can be capped; and if an employee has earned and accrued PTO days that have not been used at the time the employment relationship ends, the employee must be paid for these days.

Unless otherwise stipulated by a collective bargaining agreement, whenever the employment relationship ends, for any reason whatsoever, and the employee has not used all of his or her earned and accrued vacation or PTO time, the employer must pay the employee at his or her final rate of pay for all earned, accrued and unused vacation days. Because paid vacation benefits are considered wages, such pay must be included in the employee's final paycheck.