Under California law, whenever the employment relationship ends, for any reason whatsoever, and the employee has not used all of the employee’s earned and accrued vacation hours, the employer must pay the employee these hours. As paid vacation benefits are considered wages, such pay must be included in the employee’s final paycheck with the appropriate deductions. The employer must pay out accrued but unused vacation at the employee’s final rate of pay, regardless of the rate of pay at which it was earned. For example, if the employee earned ten hours of vacation while making $15 per hour and who later is terminated or quits while making $20 per hour must receive $200 in vacation wages with the employee’s final paycheck. See California Labor Code Section 227.3.
No “Use it or Lose It”: In California, vacation pay is another form of wages which vests as the employee earns it. Vests means the employee has lawfully earned the wages. Accordingly, it is illegal to deny an employee earned vacation pay not used by a specified date (“use it or lose it”) under California law.
California’s Division of Labor Standards Enforcement (DLSE) has repeatedly found policies requiring all vacation taken in the year it is earned (or in a very limited period following the accrual period) are unfair and unenforceable.
However, the DLSE does recognize vacation accrual policies which cap how much vacation time may continue to accrue. Thus, a sample vacation policy in an employee handbook might state, “The maximum vacation benefit for which an employee is eligible at any point is one and one-half year’s vacation pay at the employee’s current yearly accrual rate. Once that maximum has accrued, no further vacation time or benefit will accrue until the employee has used some of the time, reducing the total time available below the current maximum. At such time, the employee resumes accrual of vacation time up to a point where the maximum is again reached.”
Employers may also refuse to pay employees with money in lieu of vacation time, except upon termination of employment.