California Court of Appeal Clarifies Circumstances Where So-Called “Unlimited” Vacation Policies May Trigger a Right to Wages

California generally requires that, when employees accrue vacation time during their employment, any accrued but unused vacation time must be paid out at the end of employment.  But so-called “unlimited” vacation policies have generally been understood to be a potential exception to that rule.  Such “unlimited” policies are more accurately referred to as “professional” or “reasonable use” vacation policies, where such policies do not provide for vacation to accrue.  Instead, employees under such policies are allowed to take an unspecified amount of paid time off without accruing vacation time – except they are permitted to take vacation whenever and for whatever amount of time they would like, subject to the employees completing their work.

Employers that implement these “unlimited” policies typically put into place certain provisions making clear that, among other things, employees do not accrue (i.e., earn) any paid time-off time (e.g., vacation time) during their employment and, because time is not accrued, there is no payment for vacation not taken at the end of employment.  But on April 1, 2020, although the California Court of Appeal did not necessarily approve of “unlimited” policies with such provisions, it explained that policies without such provisions may trigger a right to accrued vacation wages.

In McPherson v. EF Intercultural Foundation, Inc., based on the particular facts before it, the Court held that the company’s purported “unlimited” paid time off policy triggered an obligation to pay wages at the end of employment for vacation not taken by the employees.  The company’s vacation policy – which was not in writing – provided that the employees could take time off with pay, but they did not accrue vacation days.  The employees did not request to take time off or track it; instead employees were required to notify their supervisors before taking time off – and taking time off during busy season was “strongly discouraged.”  Both the company and its employees agreed that the company did not provide for “unlimited” vacation.  Instead, the evidence showed that the employees “had the right to take an amount of approved vacation that was within the amounts typical of most jobs at the company [– i.e., at least 20 days’ paid vacation per year –] even if there was no precise amount expressly stated or agreed upon.”

The evidence also showed that the company did not make clear that such paid time off was not part of the employees’ compensation.  Based on this evidence, as much as the company may have referred to its vacation policy as “unlimited” or “uncapped,” the evidence showed that was not the case.  Based on these facts, the trial court found that there was an implied limit to the amount of vacation that could be taken.  The trial court explained, and the Court of Appeal affirmed, “an employer cannot avoid [the obligation to pay at the end of employment any accrued but unused vacation time] by leaving the amount of vacation time undefined in its policy while impliedly limiting the time actually available for approval.”  As such, the trial court concluded, and the Court of Appeal affirmed, that the employees were due that amount in vacation wages for which the policy impliedly provided (i.e., 20 days per year), less the vacation actually taken.

Despite its conclusion, the Court of Appeal made clear that it “appreciate[s] the benefit and understand[s] the appeal [of] unlimited time off policies.”  That said, the Court did not go so far as to expressly approve “unlimited” vacation policies.  But it did set forth the following criteria that may negate an obligation to pay wages for untaken vacation:

• The policy should be in writing;
• The policy should “clearly provide[] that employees’ ability to take paid time off is not a form of additional wages for services performed, but perhaps part of the employer’s promise to provide a flexible work schedule – including employees’ ability to decide when and how much time to take off”;
• The policy “spells out the rights and obligations of both employee and employer and the consequences of failing to schedule time off”;
• The policy, “in practice allows sufficient opportunity for employees to take time off, or work fewer hours in lieu of taking time off”; and
• The policy “is administered fairly so that it neither becomes a de facto ‘use it or lose it policy’ nor results in inequities, such as where one employee works many hours, taking minimal time off, and another works fewer hours and takes more time off.”

In light of McPherson, California employers that have so-called “unlimited” vacation policies should review them with counsel, keeping in mind the factors the Court of Appeal approved.