August 15, 2008

Labor Law Corner
Employer Can Establish Cap
on Earned Vacation Time

Barbara Wilber Labor Law Consultant

We want to limit the number of vacation hours an employee may roll over to the next year to 40 hours, but isn’t there a rule about capping vacation at one-and-one-half times an employee’s accrual rate? We plan to cash out any unused hours that exceed 40 hours.

An employer may implement a cash-out policy and limit the number of hours that can be rolled over into the next year as long as the employee uses or is paid for all earned vacation or paid time off (PTO). As well, the employer may establish a cap on earned vacation that allows a reasonable time to use any earned vacation.

The one-and-one-half-times accrual is a concept associated with the reasonable cap, not the cash-out and rollover policy. These are two completely different methods that may be used to control vacation accumulation.

California Policy

California does not require employers to provide vacation leave to their employees. Once a policy is established, however, certain rules apply.

Specifically, vacation vests as it is earned, and a “use-it-or-lose-it” policy, in which employees lose earned vacation that is not taken by a specific time, is prohibited (except for a limited opt-out provision applying to collective bargaining agreements and vacation plans subject to the federal Employee Retirement Income Security Act).

Once vacation is earned, it cannot be forfeited, but a cap may be placed limiting the amount of vacation which may accrue. Any policy instituting a cap on accrued vacation must provide a reasonable time in which to use already- earned vacation.

In the interest of meeting the “reasonable cap” criteria, employers cap accrual at one-and-one-half or two times the annual earning rate.

For example, if the employee earns 40 hours of vacation each year, the employer may cap the total amount of vacation that can be earned at 60 hours. In using this method, employers must ensure that employees may use their vacation time as it is earned. If employers do not allow employees to take vacation before they reach the cap, the cap would not be considered reasonable.

Cash-Out

Another alternative is to pay or “cash out” earned vacation, either each year or as an employee option. Some employers cash out vacation each year and allow only a certain number of hours to be rolled over into the next year.

In this instance, a one-and-one-half limit on the number of hours being rolled over does not apply because the employee receives payment for any vacation in excess of the rollover hours and earned vacation is not forfeited.

Both methods are legal alternatives to a “use-it-or-lose-it” policy and effectively control the accumulation of vacation hours. When instituting a program, recognize the differences and develop a policy that best meets your needs.

The Labor Law Helpline is a service to California Chamber of Commerce preferred and executive members. For expert explanations of labor laws and Cal/OSHA regulations, not legal counsel for specific situations, call (800) 348-2262 or submit your question at www.hrcalifornia.com.