Q. My company has a “use it or lose it” vacation policy. Is it lawful for employees who have not taken their vacations at the end of the calendar year to lose them if we have given our employees advance notice of our policy?
A. No, a vacation policy that requires forfeiting unused vacation pay is impermissible under California law. Such use-it-or-lose-it policies result in forfeiture of vested vacation pay and thus are prohibited by Labor Code Section 227.3, which states that employers must pay out all earned and unused vacation upon termination of employment. (Some collective-bargaining agreements may stipulate otherwise.)
In contrast to use-it-or-lose-it policies, policies that establish “caps” or “ceilings” on vacation pay accruals are permissible in California.