How to Handle Vacation, Sick Leave, Paid Time Off, Holidays

In this episode of The Workplace podcast, CalChamber employment law expert Matthew Roberts and CalChamber HR Adviser Ellen Savage answer common questions that employers are asking regarding vacation policies.

Here in California, we have entered the dog days of summer, and many employees are ready to take a break. In fact, industry experts expect to see the busiest travel season since pre-pandemic 2019 — and maybe even busier, Roberts says at the start of the podcast.

Many employers have been calling the CalChamber Labor Law Helpline with questions pertaining to vacation policies because they have employees sitting on substantial banks of time, or because they have questions regarding California’s special laws for vacation plans.

Vacation Policy Basics

Many employers know that having a vacation policy is not mandatory, Savage says. But when employers do offer it, the law treats it as vested wages, and employers cannot have a “use it or lose it policy.” It is considered the employee’s money (vacation earned), and if they quit or are terminated, then the vacation hours must be paid out.

Employers can, however, establish restrictions.

For example, employers may restrict when an employee actually starts accruing vacation hours. Some policies start vacation accrual after an employee has worked for the company for 60 days, others start accrual after 90 days, and others even after a year. Nevertheless, if an employee quits, whatever vacation time they have accrued must be paid out, Savage stresses.

“Let’s say I start working for you January 1, and I don’t start accruing until July 1. That’s fine. But let’s say in August, I quit. You are still going to need to pay me out for that vacation I accrued during that small time I was accruing — even if you have a policy and it says I can’t use it yet,” she explains.

Another restriction some companies establish is to offer vacation only for certain employees, Savage says. It’s not unusual for employers to offer vacation only to full-time employees, or to offer vacation only to employees in certain departments. It’s important to remember, however, that employers will need to determine how they will address a scenario where an employee moves from one of these categories to another.

Employers may also cap the amount of vacation that has been accrued so that the bank doesn’t get completely out of control. Another way to prevent vacation banks from ballooning is to require the use of vacation time.

“An employer can actually say … ‘I need you to schedule some vacation; your bank is getting too big, it’s a slow time of year.’ And an employer might actually schedule that vacation… You might say, ‘Hey, you need to use some vacation time in the next two months,” Savage says.

What if someone asks to take four weeks of vacation and they have all the time in the bank, Robert asks?

Employers have the right to either deny vacation requests for legitimate business reasons or limit the amount that can be taken at once, Savage replies. Employers may have “blackout periods” where employees cannot take vacation, such as during a business’ busy season, during the summer, or because there is not sufficient staff coverage. Employers should watch out for protected leaves during these periods, because if a protected leave specifically allows an employee to use vacation, even if it falls during the blackout period, the law is going to take precedence.

Protected Leave, Paid Time Off Plans

Under California’s paid sick leave law, employers must provide a certain amount of time of paid sick leave per year. A lot of employers get into a situation where their employees know that vacation time is vested wages and California paid sick leave time is not (it doesn’t get paid out once an employee leaves the company), and so employees want to use their paid sick leave bank for things like vacation or other personal time off, Roberts says.

Savage explains that it’s not a wise idea to allow employees to use their paid sick leave for vacation purposes. If an employer allows this, they may be turning unvested paid sick leave into a vested vacation or paid time off (PTO) bank, because the employee may use it for reasons not permitted in the sick leave statute. Under California law, one of the things that makes a bank vested and payable at termination is when it is not limited to certain specific purposes.

“So, if you let me use a sick leave day to go to Disneyland, then I could argue that that bank is now a vested bank payable at termination. So, you want to be nice, but it could come back to bite you,” Savage warns.

Some employers are exploring policies such as flexible or unlimited PTO plans, where an employee doesn’t accrue time off, but can take time off whenever they’d like. The benefit is that there are no vested wages because employees are not accruing hours, Roberts says.

Unlimited PTO plans are the Wild Wild West of labor law — there just are no rules, Savage replies. There is only one real case currently on this topic and unfortunately, the employer lost.  Labor law experts don’t have a good idea of what a solid unlimited PTO plan looks like and the Labor Commissioner has not provided guidance on unlimited PTO plans.

In the one case on this topic, McPherson v. EF Intercultural Foundation, Inc., the court found that the employer’s unlimited PTO plan was not a good one. The court did say, however, that an employer could potentially have an unlimited PTO plan, if the plan: states that the employees’ PTO is not a form of additional wages, but instead forms part of a promise of a flexible work schedule; clearly defines the rights and obligations of employees and employers; defines the consequences of failing to schedule time off; allows employees sufficient opportunity to take time off; and is administered fairly, so it doesn’t result in inequities. The last requirement may be problematic because some employees work a lot, and others work less.

“The McPherson case basically said, ‘We don’t like your plan. And if you did these things, we might like another plan, but we really don’t guarantee it. So let’s just have another case come along, we’ll see what we think of that one.’ And that makes me nervous,” Savage says.

Roberts urges employers considering a flexible or unlimited PTO plan to consult with legal counsel, because without guidance, an employer can end up in a situation like the McPherson case and get hit with massive vacation wages and damages.


No federal or state law requires employers to provide paid holidays, nor does a business have to shut down on the holiday, Savage explains. And if a business chooses to close on the holiday, it is not required to pay its non-exempt employees.

In California, if an employer offers holiday pay, they are essentially creating a contractual obligation to pay an employee while they are not working.

There are several options at an employer’s disposal if they offer holiday pay but need an employee to come in to work during a paid holiday. Savage’s preference, she says, is to pay the employee the holiday pay and additionally pay for all hours worked on the holiday, and pay it straight into their paycheck because it’s simpler.

Another option would be to provide another day off in lieu of the extra holiday pay, but there are concerns about when the holiday has to be taken, such as the same week or in the same pay period or in the same month.

“It is really easy for that day to end up getting lost — everybody forgets about it — and then it becomes the subject of … a waiting time penalty claim when it’s not paid out at termination,” she says.

Some employers would like to offer floating holidays, such as to allow an employee to celebrate their birthday or date of hire, Roberts says.

Savage replies that she doesn’t understand why employers in California would choose to use floating holidays. After all, an employee can use their vacation time and floating holidays interchangeably. It’s “an easy place for an employer to get tripped up and end up in a very expensive lawsuit.”

One-Size-Fits-All PTO Plans

Roberts explains that California’s paid sick leave law allows employers to wrap the requirements of the law into their existing PTO plan as long as it meets the requirements of the law.

This one-size-fits-all PTO plan may seem like a great way to put everything into a single bank, but combining a sick leave plan and vacation plan into a PTO bank is like “taking all the pieces from Monopoly and chess, throwing them on the same board and then trying to play a game,” Savage says.

In doing this, an employer is intertwining very different rules and it causes a lot of confusion.

“When people call me and say, ‘OK, my employee wants to use all three weeks of PTO that they have for sick leave, but I only let them use three days of sick leave,’ I say, ‘Well, how do you know how much of that PTO bank is sick leave?’ We don’t,” Savage says.

It is because of this uncertainty and confusion that Savage recommends that employers clearly separate their sick leave and vacation policies.

“Sick leave says 48 hours, vacation cap is ‘reasonable cap’ on accrual, like we just talked about. How do you set your caps? And Lord help you if you’re in a local area that has a local sick leave ordinance that you’re trying to layer in on top of that as well. Yeah, that’s just head spinning,” she says.

CalChamber members can read more about Vacation, Paid Time Off and Holidays in the HR Library. Not a member? See how CalChamber can help you.

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