Our company offers floating holidays to employees. Do these floating holidays have to be paid out at termination?
The short answer is — it depends. As discussed below, employers must be careful that their floating holiday policies clearly state when floating holidays may be taken and for what reason. Otherwise, you may end up having to pay out floating holidays as vested time at termination.
What Is a Floating Holiday?
Many California businesses provide a certain number of traditional paid holidays to employees such as Christmas and New Year’s Day, etc. Although not required by law, some employers also choose to offer paid “floating holidays” (or personal days) to employees.
These additional days may allow employees flexibility to observe a holiday such as Rosh Hashanah, Diwali or Juneteenth, or to celebrate a significant day such as a birthday or work anniversary.
Some employers do not require employees to use these holidays for a specific day or event; instead, the holidays “float,” and the employee can use the floating holidays whenever they wish.
Payout Upon Termination?
As most employers are aware, California law prohibits “use-it-or-lose-it” vacation policies and requires that an employer pay all accrued and unused vacation to an employee whenever the employment relationship ends. (California Labor Code Section 227.3)
Under California law, traditional holiday pay is not a vested benefit and does not have to be paid out at termination.
Depending on an employer’s approach, however, unused floating holidays may need to be paid out at termination. If a floating holiday is treated generally like vacation (that is, it can be taken at any time and is not connected to a specific event), the floating holiday will be treated as vested time (like vacation) and must be paid out at termination.
The Division of Labor Standards Enforcement (DLSE) has stated that leave time which is provided without condition is presumed to be vacation, no matter what name the employer gives to the leave. (DLSE Enforcement Policies and Interpretations Manual, Section 15.1.12)
Bottom line: If you offer floating holidays that are available to an employee to use at any time for any reason, you must treat the floating holidays as vested vacation time and pay out any unused days at the end of the employment relationship.
On the other hand, a floating holiday that is treated like a traditional holiday and is tied to a specific event (such as an employee’s birthday or work anniversary, or the selection of one of several holidays) is not treated as vacation and does not have to be paid out at termination. (DLSE Enforcement Policies and Interpretations Manual, Section 15.1.12)
For example, if an employer offers a floating holiday to each employee to be used on or near their birthday, no payout for that floating holiday is required when an employee separates from a company before their birthday.
Clear Written Policies
Because employers can treat floating holidays in different ways, an employer’s policy is critical to determining if unused floating holidays will need to be included in an employee’s final pay.
Employers who want to avoid paying out floating holidays at termination should consider having a floating holiday policy that clearly connects time off to a specific event, such as an employee’s birthday or work anniversary. Otherwise, the floating holiday will likely be viewed as merely vacation by another name, subject to payout at the time of termination.