A consequence of the prolonged shelter-in-place and stay-at-home orders issued as a result of the COVID-19 pandemic is dramatically reduced travel. As a result, during this time many employees are not taking earned vacation time and may not do so for months resulting in the following question from employers: Can we change our vacation policies as a result of the employees not using their time?
This is a tricky question. Generally, however, employers do have control over their vacation policies subject to certain rules. Below are some common ways in which an employer may address its vacation policies while staying within compliance.
Accrual Caps
California law allows employers to set reasonable caps on vacation accruals. Accrual caps mean that the employee no longer accrues vacation time while they’re at the cap.
Although there’s no set standard on what a reasonable cap may be, commonly caps meet this requirement when they are no less than 1.5 to 2 times the annual rate for employees. This is because employees need to be provided a reasonable opportunity to take all the vacation that they earn within a year.
So, for example, an employee who accrues 40 hours of vacation a year should have a cap of no less than 60 hours before they stop accruing vacation.
Some employers who have already instituted caps want to temporarily increase the cap as a benefit to the employee since there’s little incentive to use vacation during a shelter-in-place order.
Employers may increase or decrease their caps; however, California prohibits “use it or lose it” vacation policies. For example, if an employee has a 200-hour cap, and the employer decided to temporarily increase that cap to 240 for the rest of year, the employer cannot take away any vacation hours in excess of 200 once the employer decides to return the cap to that level.
Cash-Out Policies
California law considers vacation hours to be vested wages. This is why vacation hours must be paid out along with final wages. California law allows employers to cash-out vacation hours; however, the cash-out must be paid at the employee’s current rate of pay.
Unlimited Vacation
Some employers have moved to a new type of vacation benefit where the employee has unlimited hours and the employer no longer tracks accrued hours or pays out any vested vacation wages upon termination.
Employers who have an accrual method may switch to an unlimited one, but again, any hours the employee accrued under the old policy cannot be forfeited.
Also, the law regarding this type of policy is unsettled. Any employer considering switching to an unlimited policy should consult with legal counsel to evaluate the risks.
Required Usage
Employers may require employees to take vacation at certain times of the year. However, internal Labor Commissioner guidance requires that employers provide reasonable advance notice of the requirement. The Labor Commissioner determined that 90 days would constitute reasonable advance notice.
In general, the Labor Commissioner will handle any vacation claims based on the principles of equity and fairness. So, where an employer wants to change its vacation policy, it should keep those principles in mind along with the rules under California law.
Matthew J. Roberts, Employment Law Counsel/Subject Matter Expert
CalChamber members can read more about Vacation in the HR Library. Not a member? See how CalChamber can help you.
