250 | 2024 Cal-Peculiarities ©2024 Seyfarth Shaw LLP www.seyfarth.com service charge is considered a gratuity by a reasonable customer in the industry, the Court may consider several factors, including written contracts between the parties, the subjective intentions of the customers, and custom and practice in the industry. As to tips paid by credit card, California employers must pay the employee the full amount of the gratuity indicated by the customer on the credit card slip, without deducting for any processing fees, and must pay the gratuity to the employee no later than the next regular payday following the date the patron authorized the credit card payment.437 7.19 Vacation Pay California differs from most states by treating accrued vacation as a form of wages.438 More specifically, by virtue of a Supreme Court interpretation of Labor Code section 227.3,439 earned vacation must not be forfeited, unused vacation pay must be paid on termination of employment, at the final rate of pay, vacation pay is deemed to be earned daily, “use it or lose it” policies are unenforceable, and “paid time off” is treated as vacation. Section 227.3’s vacation rules apply “[u]nless otherwise provided by a collective bargaining agreement.” The Court of Appeal has interpreted this exemption narrowly, holding that section 227.3 rules apply even to unionrepresented employees unless their CBA “clearly and unmistakably waives” section 227.3 rights.440 7.19.1 Accrued vacation pay is a form of wages An employer need not provide any paid vacation at all. But if the employer does so, then California treats vacation pay as wages earned on a daily basis and not subject to any forfeiture and requires that all earned, unused vacation be paid upon termination of employment at the final rate of pay, regardless of when the vacation was earned or whether the employee had become eligible to use the vacation.441 The basis for this peculiar doctrine is a California statute, Labor Code section 227.3, which provides that “all vested vacation shall be paid” to terminating employees “as wages at [their] final rate” and that no employer policy shall provide for “forfeiture of vested vacation time upon termination.”442 Because the right to be paid for the amount of vacation time offered by an employer constitutes deferred wages for services rendered, the employee is entitled to receive pay, at the time of termination, for the pro rata share earned during the time that the employee rendered services to the employer. According to an unpublished Ninth Circuit ruling in Mills v. Target Corporation, the “final rate” means the employee’s “final wage rate,” as opposed to the final base hourly rate.443 The Mills Court held that this includes an employee’s base pay and any pay differentials at the time of termination. However, the decision did not address whether an employee’s regular rate of pay must be used for the final payout if the employee receives other compensation, other than shift differentials, that would potentially impact their regular rate of pay. As a result, some uncertainty around that issue exists.
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