Hunton Employment & Labor Perspectives

The California Court of Appeals for the Second District evaluated the validity of unlimited vacation policies in a recent decision. Unlimited vacation policies operate how one might expect: instead of having a specific number of hours vest that the employee can use to take paid time off, an unlimited policy provides that the employee can take as much vacation per year as they would like to subject to company approval. In California, when vacation vests, it is treated as wages at termination and must be paid out. Since unlimited vacation does not vest, there is no payment due at termination.

In McPherson v. EF International Foundation, Inc., the Court of Appeal determined that the specific facts surrounding the employer’s unlimited vacation policy rendered it invalid. The employer did not have a written policy stating that vacation time was unlimited, nor did it tell the employees that their vacation time was unlimited and would not be treated as wages. Additionally, testimony showed that the company expected the employees to take vacation in a fixed range (i.e., two to four weeks).

The Court also provided some interesting guidance in unbinding dicta. In the unpublished portion of the decision, the court lays out the steps that employers should take to ensure that their vacation policy is truly unlimited and does not require employers to pay out vested time at the end of employment:

• The policy must clearly provide that the employees’ ability to take paid time off is not a form of additional wages for services performed;
• The rights and obligations of the employee and employer must be clearly outlined, including consequences for failing to take time off;
• The policy must allow sufficient opportunity in practice for the employees to take time off or work fewer hours in lieu of taking time off; and
• It must be administered fairly so that it does not become a de facto “use it or lose it” policy or result in inequities, such as when one employee works many hours, takes minimal time off, while another employee works fewer hours and takes more time off.

Although the Court’s guidance could be useful background against which to evaluate current unlimited vacation policies, employers should keep in mind that it is unbinding, and courts of appeal in other districts or the California Supreme Court may not agree with this approach.