Time Savers
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      Although there is no federal law that entitles private sector employees to paid or unpaid vacation, most employers do give employees a paid vacation, and most employees consider it to be one of their most important benefits. There is a growing body of state law--an amalgam of statutes and court decisions--that does govern how employers administer vacation time, including whether and how much employees must be paid at termination for accrued but unused vacation. Employers must know their own state laws in order to develop a comprehensive policy covering eligibility, accrual, carryover, forfeiture, administration, pay upon termination, and integration of vacation policy with other state laws, and to ensure strict compliance and consistency of administration. The policy should be communicated to employees at the time they begin work (in a number of states, this is required).

Vacation Accrual

     Accrual is simply the particular method by which vacation time is accumulated; in most states, employers may set accrual methods up however they wish. Many companies require employees to work a certain number of months before earning any vacation credits.

     Following is one method (there are many) of determining accrued vacation during an employee's first year.

     No vacation days are earned during the first 2 months of employment. After this 2-month period, 1 day of vacation is earned for each full month worked, up to a maximum of 10 days for that calendar year. More than 50 percent of a month may be counted as 1 month for these purposes. Before the completion of 6 months of service, only accrued vacation days may be taken. On January 1 of the following calendar year, each employee who has then completed 6 months of service will again earn 1 day per month up to 10 days. After January 1 following the completion of a full year of service, the following schedule applies:

Length of Service as of January 1Days Accrued
1 through 4 years10 days
5 through 10 years15 days
11 years 16 days
12 years17 days
13 years18 days
14 years19 days
15 years20 days

     In this way, the new employee effectively earns no vacation during the first 2 months of employment, and 1 day of vacation for each full month thereafter, up to a maximum of 10 days in the first year. After 5 years of employment (or whatever period of service is required), employees can then earn 1 1 / 2 days per month up to a maximum of 15 days.

     Note: To avoid confusion, it is essential to have a cutoff day (e.g., June 30 or December 31) when vacation accrual for that year ceases.

     Employers should decide and communicate in advance whether they will allow vacation days to be carried over, how many, and for how long. It is perfectly acceptable to have a different or more generous vacation policy for professionals, managers, or supervisors.

Some Vacation Options

     Employers that incorporate vacation policies into a flexible benefits plan may allow workers to "sell" vacation days in exchange for other benefits or "buy" vacation days by giving up other benefits. For instance, an employee with a working spouse who has good medical coverage might give up some of his or her medical insurance in exchange for an extra week's vacation. Or an employee with small children might "sell" back some time in exchange for a child care subsidy. There are endless possible combinations, and employees like the freedom of choice. While a benefits program of this kind can be difficult to administer at first, if structured correctly, it may come at little additional cost to the employer. On the other hand, it is very important for employees to take vacation time and use it to rest and recover and not think about work; employers should encourage them to do so.

     Some other common vacation practices include:

     · Granting employees an extra day's pay, or an extra day's credit, if a holiday falls during a vacation
     · Substituting sick leave if employees suffer an extended illness during vacation

     Note: The IRS has ruled that employees in a particular company could transfer unused vacation pay to their 401(k) plans. However, the ruling applied only to the company that requested it, and very few companies qualify to implement such a method under 401(k) plan restrictions. So far, this is not a viable option for most employers.

Unpaid Vacation

     Some large employers mandate that their employees take extra time off as vacation without pay in order to cut corporate costs without resorting to layoffs. Some employers require only a few days; some make their unpaid leave programs voluntary; and some ask employees if they are interested in taking the summer off--without pay, but with full benefits and a guaranteed return to their jobs. Another option is to work part time during the summer with half pay and full benefits.

     Employers that wish to force leave must be sure that no policy prohibits the company from designating leave time and should have policies stating that employee leave must be taken at times convenient to the company.

Family and Medical Leave Act (FMLA) and Vacation

     Employers covered by the FMLA are permitted to require that employees use accrued vacation time for FMLA leave. Employees must also be allowed to substitute paid accrued vacation for unpaid FMLA leave, without restriction. This also holds true for state leave programs.

Please see the national Leave of Absence section.

Paid Time Off

     Some employers are opting for Paid Time Off (PTO) programs, believing that such programs cut down on unscheduled absences. A PTO program combines days off, which would otherwise be set in fixed allotments (i.e., vacation, sick time, personal days, and holidays), into a bank or pool. Employees may take as many days as they need within the employer's cap or limit, for any reason. The concept of a specific number of sick days or vacation days is omitted; the employee does not have to make a choice, and the employer does not have to determine whether the choice is legitimate.

     PTO leave banks may be fashioned in any number of ways. Some questions the employer should decide are:

     · What types of absences will be included? For example, will the absences include simply sick, vacation, and personal time, or will jury duty, educational time, or funeral leave be included?
     · How many days will be available?
     · What happens to unused leave at the end of the year?
     · What about when an employee terminates with time remaining in the bank?

Vacation and Termination

     Some state laws consider vacation time the equivalent of wages; therefore, it must be paid at termination. In some states, court decisions have said that if an employer offers paid vacation and the employee has earned it by working through the accrual period, the time must be compensated at termination. A number of states prohibit accrued vacation time from being lost ("forfeited") for almost any reason. Some states do not require that unused vacation be compensated at all. Some employers opt to compensate unused vacation regardless of the law, or under certain specified circumstances.

Please see the state Vacations section.

BLR's Survey of Vacation Practices

     Companies in the Far West and Northeast/Middle Atlantic regions appear to have the most generous vacation policies, offering 1 to 3 weeks of vacation. This geographic trend is consistent for all levels of employees--exempt, nonexempt office, and nonexempt plant. The Far West, though, fell behind most other regions in the number of employers who offered a fourth or fifth week of vacation to their employees.

Standard Practice

     According to BLR's latest nationwide survey of employee benefits, standard vacation practice is:

      Two weeks. Employees receive 2 weeks of vacation after 1 year of work.


      Three weeks. The majority of employers require employees to work for 5 full years to qualify for 3 weeks of vacation.


      Four weeks. The majority of employers require 10 or more years of work to qualify for 4 weeks of vacation.


      Five weeks. About one-third of survey respondents offer a fifth week, but more than half of them make eligibility conditional on 20 or more years' service.


Business & Legal Reports, Inc. offers several model vacation policies in The Personnel Manager's Encyclopedia of Prewritten Personnel Policies.

Related Topics:
Private Sector
If Vacation Is Promised, It Must Be Granted

     Although no California law requires private sector employers to provide employees with vacations, whether paid or unpaid, most employers do offer their employees some version of vacation. It is important for employers to keep in mind, that in California, if employers "promise" vacation, they may be legally bound to provide it--and a binding promise does not require embodiment in a formal employment contract. California case law says that an employer's assurance of paid vacation time, whether made in an employee handbook, or given orally, or simply a matter of consistent practice, under most circumstances, constitutes a binding and enforceable implied contract.

     In addition, California employers have the right to decide when employees may take their vacations and the length of time employees are allowed to be away on vacation.

     Employers may allow employees the option of receiving cash instead of using their vacation days. The employer can establish certain times during the year when an employee can receive the cash instead of using their accrued vacation time, or can allow employees to cash in at any time during the year.

     Employers may allow employees to take vacation time before it is accrued, but do not have to allow this.

When Vacation Pay Is Due at Termination

     The state Supreme Court has ruled that vacation pay is, in effect, additional wages for services performed, a form of deferred compensation. When an employee is terminated without having taken his vested vacation time, compensation for the vested, unused vacation must be paid as wages at the employee's final rate. California does not allow a "use it or lose it" vacation policy; no employment contract or agreement may allow for the forfeiture of accrued, or "vested" vacation time. There is an exception for employees under a collective bargaining agreement; the "use it or lose it" policy may apply if it is part of the agreement.

Accrual Method

      Employers are free to devise their own system for vacation accrual. There are several different commonly used options:

     · On a monthly basis
     · On a pay-period basis
     · Upon completion of a 6-month or 12-month period

      It is important for employers to be clear and unambiguous when drafting their vacation policies. If the policy is intended to ensure that employees work the entire accrual period to earn their vacation days, it should state clearly that employees will not be entitled to pro rata payment if they leave partway through the period. Remember that any vagueness in the policy is likely to be construed against the employer.

     Such a system may limit only the period of vacation that may be accrued--not whether it must be compensated after it is vested.

      Cap on accrual. Employers may reasonably limit the accrual of vacation beyond a certain limit--for example, at 1 1 / 2 or 2 times the annual accrual. Once a level of vacation beyond the employer's cap accrues, the employee may accrue no more days until one or more are taken. Then the employee begins to accrue vacation time again.

      Vacation pay vests as it is earned. Both statutory and case law say that vacation pay vests as it is earned, so that an employee who leaves the job must be paid pro rata for vested vacation no matter what the employer's policy might say. For example, an employer's policy might provide that an employee may take 2 weeks of vacation after 1 full year of service--but an employee who leaves after 6 months is entitled to be paid for 1 week, even though the person could not actually have used vacation time until the year was up.

      Four-Year limit on payment. There is a 4-year limit on payment of accrued vacation at termination (because it is based upon contract). In other words, an employee that is allowed to take vacation as soon as it is accrued, may not ask for any more than 4 years retroactive vacation pay at termination .

      Paid time off. Employers may lump together vacation, sick leave, personal days, etc. into an amalgam of time called "paid time off" (PTO). However, employers should note that at termination the entire PTO will be considered vacation, and all unused time must be compensated (CA Lab. Code, Sec. 227.3, DLSE Interpretive Bulletin No. 86-3, Sec. 6(a); Suastez v. Plastic Dress-Up Co., 31 Cal. 774 (1982); Boothby v. Atlas Mechanical, Inc., 8 Cal.Rptr.2d 600 (1992); Sequiera v. Rincon-Vitova Insectaries, Inc., 32 Cal. App.4th 632 (1995)).

Public Sector

     In the public sector, vacation time is mandated by law. After 6 months of continuous work, full-time state employees must receive (CA Gov. Code Sec. 19858.1):

     · 5 / 6 day per month from the first month to 3 years of service
     · 1 1 / 4 days per month after the third and through the 10th year of service
     · 1 5 / 12 days per month after the 10th and through the 15th year of service
     · 1 7 / 12 days per month from the 16th through the 24th year of service
     · 1 2 / 3 days per month after 25 years of continuous service

      Annual leave. As an alternative to the regular system of vacation accrual, public employees may make an irrevocable choice to participate in an annual leave program that combines sick leave and vacation time (CA Gov. Code Sec. 19858.4).


For additional information about vacation policies and pay in California or for answers to specific questions, employers may contact:

Division of Labor Standards Enforcement

California Department of Industrial Relations

455 Golden Gate Avenue, Ninth Floor

San Francisco, CA 94102