©2023 Seyfarth Shaw LLP www.seyfarth.com 2023 Cal-Peculiarities | 253 (3) whether (as always must be the case) the sabbatical is granted in addition to the average vacation given in the relevant labor market, and (4) whether the employee is expected to return to work once the leave ends.437 7.19.6 ERISA preemption Some employers have sought to avoid California vacation law by funding vacation pay through an ERISA plan.438 7.19.7 Claims for vacation pay do not accrue until termination The DLSE, in an unusually pro-employer opinion letter, once decided that the time for an employee to claim vacation pay begins to accrue when the vacation pay is earned. Employers that had used improper “use it or lose it” vacation plans could at least limit their liability to long-term employees by disregarding vacation pay earned beyond the statutory limitations period. But the Court of Appeal then held that a claim for unused vested vacation pay accrues only upon termination of employment, not before, regardless of when the vacation pay was earned.439 An employee suing for unpaid vacation pay at the end of employment thus can rely on vacation earned at any time during the employment. 7.19.8 Employers can pay vacation benefits at lower rates during employment The vacation pay statute requires that an employer pay an employee, upon termination, “all vested vacation … as wages at his final rate in accordance with such contract of employment or employer policy respecting eligibility or time served.”440 The Court of Appeal has recognized that this provision does not require employers to pay vacation at the employee’s regular rate during employment. The Court of Appeal thus affirmed the dismissal of a claim by employees complaining that they during their employment they received vacation pay in flat sums of $500 or so per week instead of receiving their (higher) regular rate of weekly pay.441 7.19.9 Transition to “no vacation” or “unlimited vacation” policies? Peculiar California vacation law inspired some employers to discontinue traditional paid vacation in favor of “unlimited time off” policies. The thinking was that at-will employers could prospectively change vacation plans. While employees could retain any accrued, unused vacation pay, the employer would pay off that balance at some point, such as when the new policy began or when employment ends. The new policy would take care to avoid suspicion that it is a “subterfuge” to hide an unlawful “use it or lose it” policy. Thus, the policy would not specify limits on how much time off employees may take. But the policy would include safeguards, such as (1) requiring manager approval for significant lengths of time off, (2) imposing a business-needs requirement to ensure that employees remain available during critical periods, and (3) specifying that time off taken for leaves of absences or for sabbaticals would not be paid. This kind of policy might work for certain exempt employees. “Unlimited paid time off” policies for nonexempt employees, meanwhile, would seem impracticable. Nonexempt employees by their nature generally require supervision, which is incompatible with policies that give employees discretion to manage the time needed to do their work. Likewise, while exempt employees get paid the same regardless of how many hours they work, nonexempt employees generally get paid for all time worked, which employers must record; that arrangement would be at odds with an unlimited time-off policy. So how does an “unlimited PTO” policy fare when legally challenged? Early results were not promising. In a 2020 case, the Court of Appeal ruled in favor of exempt employees seeking pay for vacation time that they argued they accrued despite their employer’s unlimited, no-accrual vacation policy. The employer thought it had an “unlimited PTO” policy because the employer did not promise specific amounts of paid vacation and did not cap how much vacation employees could take. But the employer had no written statement that PTO was unlimited, and the employer in practice expected employees to take just two to four vacation weeks per year.
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