H.R. Alert

Paid Vacation – The Basics

The purpose of Paid Vacation is to provide your regular full-time employees with a period of rest and relaxation so that they return to work invigorated and refreshed. The pay-off for them is that they get paid for sitting on a beach at Lake Tahoe and your pay-off is that upon their return they are motivated and energized to work.

There is no law that states that you must provide Paid Vacation. This is a discretionary benefit and once you provide this benefit you must abide by certain legal constraints. The only benefits you must provide depending upon the size of your organization are statutory benefits, e.g., Social Security, State Unemployment Insurance, State Disability (your employees pay for), Workers’ Compensation and various paid and unpaid leaves of absence.

To begin with there are two very important considerations when addressing Paid Vacation: 1) accrual versus “gifted” calculation of Paid Vacation and 2) Paid Vacation is “vested” which simply means that once an employee accrues Paid Vacation you cannot take it away.

I strongly recommend that if you provide Paid Vacation that you stipulate that all Paid Vacation is earned or accrued on a prorated basis. That means that an employee accrues a proportionate amount of Paid Vacation for every hour, week or month of employment; I recommend that you accrue Paid Vacation based upon a predetermined amount of vacation days per month. Why? So your employees can calculate their accrual on their own. On the other hand, if you tell your employees that they receive 10 days of Paid Vacation each year by definition your employees may logically argue that it is his/her right to take all ten days after their first month of employment. Why? Because you told them that “they get 10 days of Paid Vacation each year” and by implication they can take it any time they want.

If you use the accrual method an employee is allowed to take only the amount of Paid Vacation that she/he has accrued to date. For example, you have a Paid Vacation benefit that allows an employee to accrue up to 5 days of Paid Vacation each year. At their six month anniversary they have accrued 2.5 days of Paid Vacation and that is the maximum amount of Paid Vacation you should allow them to take off. If they want to take additional time off you may allow them to take the balance as unpaid vacation.

Your Paid Vacation policy should be carefully documented in your employee handbook and may look like the following:

EMPLOYMENT PERIOD                     VACATION DAYS EARNED PER YEAR

From date of hire to the end                 5 days; accrues at 0.43 days /month of the first year

Beginning the 3rd year and                 10 days; accrues at 0.86 days/month every year thereafter

Remember if you do not have it in writing your interpretation and the employee’s may differ. If you have to appear before the Labor Commissioner guess who is going to win?

California employment law is very clear that all Paid Vacation is “vested” or protected. That means that once an employee accrues Paid Vacation you must either provide them with the time off or give them the cash equivalent of any accrued Paid Vacation. Some employers believe that if an employee does not use all their accrued Paid Vacation by the end of an employee’s anniversary year they lose their accrued Paid Vacation. This “use it or lose it” policy is illegal. What you may choose to do is to insist that all Paid Vacation accrued must be used by the end of either the calendar or anniversary year or you will schedule the employee’s vacation for them or hand the employee a check at the end of the year. The best strategy I have seen work is where you tell your employees that they are to discuss their vacation plans with their families during the month of February (any month will do) and report to you on March 1st when they plan to be on vacation throughout the year. You do not care where they are going but you insist on knowing when they are going. This has the added benefit of allowing you to forecast when your entire crew will be on vacation for the entire year.

If an employee does not use all their accrued Paid Vacation during the year it is earned you only have two options: 1) you allow them to roll over the unused balance to the following year or, 2) pay them the cash equivalent at the end of the year.

What you may do is to put a “cap” on the future accrual of Paid Vacation until the employee uses some of his current accrued vacation. You simply document in your employee handbook that once an employee accrues (an example) twice their annual accrual (10 days Paid Vacation multiplied by 2 equals 20 days of vacation) the employee is prohibited from earning any additional vacation until the balance drops below 20 days. This is legitimate and legal.

If you do not like my February notification plan then I would suggest that you require that your employees provide you with a written request at least 60 days prior to the requested vacation. You should also indicate and document that you reserve the right to decline a request for Paid Vacation due to your present busy workload. I like the ideas of “dark” and “open” periods. A dark period is when your business is so busy you want “all hands on board” and no one is to go on vacation. An open period is a period when you may be closed or conducting minimal business and you want to encourage employees to go on vacation, e.g., Christmas to New Years’, etc.

To avoid any confusion about whether a vacation is considered time worked, you should also state in your handbook that Paid Vacation is not considered time worked for the purpose of calculating overtime.

Because Paid Vacation is considered a vested benefit any employee resigning, being laid off or being terminated for a performance issue must receive on the final day of work all his/her accrued and unused Paid Vacation at the rate she/he was earning on his/her last day on the job. This applies even if she/he embezzled you and she/he was walking out the door in handcuffs.

Does Paid Vacation accrue during a leave of absence or period of disability? It depends upon the nature of the leave. Therefore I would document in your handbook that Paid Vacation will not accrue during a leave of absence or period of disability unless required to do so by federal and state law.

What happens if a paid holiday falls during an employee’s vacation? Simply document that under this circumstance the employee will be credited with one additional day of Paid Vacation.

Can you limit the number of employees on Paid Vacation at the same time? Yes, you can insist that only one employee from each department may be on vacation at the same time.

I hope that you are reading the message that whatever your policy is it must be carefully documented in your employee handbook and summarized in your offer letters.

As always, if you have questions please call.

Larry Levy –Employee Relations Management (415) 892-1497

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