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How should we manage unused vacation?

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in Compensation and Benefits,Human Resources

Q. Several of our employees have compiled a lot of vacation time. Is there any way we can manage how much vacation leave time our employees accrue?

A. Yes, companies generally can manage their employees’ accrual and use of vacation time with a time-off policy. Employers have several options on how to deal with unused vacation time. Employers may:

  • Pay employees the equivalent in cash
  • Force employees to use their time (as long as em­­ployees are given a reasonable amount of time in which to use it)
  • Allow them to carry unused hours over to the next year.

However, employers in California may not force employees to forfeit accrued leave. This is because, in California, paid vacation is a form of wages, which vests as it is earned.

Accordingly, a policy that provides for the forfeiture of vacation pay that is not used by a specified date (a so-called “use it or lose it” policy) is illegal under California law.

On the other hand, it would be legal in California to institute a vacation policy that caps vacation accrual once a certain number of hours has been reached. Those policies prohibit further accrual of vacation once a certain amount is earned but not taken, until the balance falls below the cap.

California’s Division of Labor Standards Enforcement (DLSE) distinguishes use-it-or-lose-it policies (which result in a forfeiture of accrued vacation pay) from vacation “caps” or “ceilings,” which merely limit the amount of vacation that can accrue.

The DLSE notes that the time periods involved for taking vacation must be reasonable and may not be a subterfuge to deny employees vacation or vacation benefits. For example, the DLSE has found that vacation policies that require all vacation to be taken in the year it is earned (or in a very limited period following the accrual period) are unfair.

So, employers in California should be wary of how they manage their employee’s use of vacation time, especially if they force employees to use their vacation time within a limited time period.

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