Vacation Deceleration
When Vacation Hits the Brakes
The new year is an ideal time for employers to review and update employment policies for compliance. As you dust off your handbook, take a moment to examine your vacation accrual structure to ensure it is not “decelerating.”
While California employers are not required to provide paid vacation, once offered, vacation is treated as wages. Under Suastez v. Plastic Dress-Up Co., vacation vests as labor is performed and must be paid out at termination. It cannot be forfeited.
But what about those pesky, short-term employees who don’t work for your organization long enough to become contributing members?
Many California employers implement a waiting period during which employees do not accrue vacation. When drafted correctly, this is permissible and can help ensure paid vacation benefits are provided to employees who remain with the organization beyond the waiting period.
The California Division of Labor Standards Enforcement recognizes that employers may implement a bona fide introductory or waiting period during which no vacation is earned. However, if the structure of the policy isn’t set up correctly, it can nullify an employer’s attempt to limit liability. If the structure of the policy suggests that employees are effectively earning vacation during the waiting period, the Labor Commissioner may view it as subterfuge. If that occurs, employees who separate during the waiting period could be entitled to prorated vacation pay.
A common compliance issue arises when accrual effectively “decelerates” over time and employees appear to accrue vacation at a higher rate immediately following the waiting period than in subsequent years.
As an example, meet Mr. Max V. Employee.
Max is hired in July and the vacation policy in the employee handbook provides that he will receive one week of vacation after completing a six (6) month waiting period and then he will receive another week of vacation every January 1st thereafter. At first glance, this seems straightforward. But, mathematically, to grant one week of vacation after six (6) months of employment, Max effectively accrued vacation at a rate of 1.538 hours/week during that initial period. But in the following year, when Joe receives just one (1) week of vacation per year, the accrual rate is effectively 0.769 hours/week. In other words, Max’s accrual rate slows down.
When an accrual rate decelerates, it can create the appearance that the employer is retroactively compensating for time worked during the waiting period. If a waiting period is determined to be invalid, then Max would be owed a prorated amount of vacation pay on his exit date even if he leaves during the waiting period.
Frontloading is not inherently unlawful. Nor are waiting periods. The issue arises when the mathematical structure of the plan undermines the stated waiting period. If the numbers imply retroactive accrual, the vacation policy may not withstand scrutiny regardless of how clearly the handbook policy states, “no vacation is earned during the first six months.”
If your vacation policy decelerates, it may be time for a tune-up before it leads to unexpected payout liability. Please reach out if you want our support with setting compliant handbook policies on cruise control.