What Qualifies as an Unlimited Vacation Policy?

Posted on Monday July 18, 2022

When an employer offers unlimited vacation policies, employees must truly have the right to unlimited vacation in order for an employer to avoid paying for unpaid vacation time. A recent case highlights how to tell whether your employer violated your rights. Employers say that there is no “vesting” (or accruing) of vacation days with an unlimited vacation policy, so no compensation would be due upon termination. Employees, on the other hand, say that so-called unlimited vacation policies are just a way for companies to avoid paying for accrued vacation days.

California has employment laws that provide extensive protections for employees, one of which is to provide employees with compensation for unused vested vacation time. For example, if you earned three weeks of vacation time while you were working, but you only used two weeks, your employer should pay you for the one week of unused vacation time you had remaining. With a traditional vacation accrual policy, employees generally accrue one paid vacation day every four weeks. So if he or she was terminated after four months and never took a vacation, the employer would be required to pay out for extra days of work.

Many employers try to find ways to avoid paying for unused vacation time to former employees. One tactic is to develop unlimited vacation policies, which do not require payment for unused time, in addition to having other benefits. However, some companies have misused a so-called unlimited vacation policy and, as a result, violated the rights of employees. If you think your employer might have violated your rights, contact our California unpaid vacation lawyers for help.

What Is an Unlimited Vacation Policy?

With an unlimited vacation policy, employees can take as many vacation days as the company can manage. The employee remains responsible for completing their tasks in a timely manner and is not always guaranteed to be granted permission for any specific day to be taken off. With this kind of policy, an employee could take every Monday off if the work environment and the employer allowed it.

Pros and Cons of Unlimited Vacation Policies

Things people tend to like about unlimited vacation policies are:

• A company with an unlimited vacation policy may suggest to employees that it offers a cutting-edge, progressive atmosphere, helping to attract the very best workers.
• Some believe a company with an unlimited vacation policy experiences more staff wellness. Employees may be more productive when they feel more in control of their schedules.
• Some believe an unlimited vacation policy fosters an ownership mentality among workers because it shows that the company respects and trusts its staff. Theoretically, that should lead to happier workers.

Things people tend to dislike about unlimited vacation policies are:

• As we’ve already explained, there is no compensation for unused vacation time when you stop working for the company in question. Imagine if you started working in February and were waiting until Christmastime to take your big vacation. You get fired in November, never took any time off for almost a year, and did not get paid for any unused vacation time in your final paycheck.
• Research has shown that employees rarely take excessive time off when a company implements an unlimited vacation policy, but it definitely can happen. This can cause strain on the other workers and interrupt the company’s day-to-day operations.

Traditional vs. Unlimited Vacation Policies

California Labor Code Section 227.3 mandates that paid vacation time that an employee earned but did not use is considered to be wages to be paid on the employee’s final paycheck. This law only applies to traditional vacation policies, however, in which employees can accrue up to a certain amount of paid time off (PTO).

Many employers have been switching to unlimited vacation policies in recent years, however, as they give employees greater flexibility and relieve administrative burdens from employers. Under these policies, employees are trusted to take PTO when they need to, as long as their job duties allow it. Employees do not accrue vacation time as they work, so it is different from having a bank of vested vacation time to be used at a later time. Because there is no vested vacation time, there is nothing to pay out for unused time upon an employee’s departure.

California Courts Regarding Unlimited Vacation Policies

In a recent case, the California Court of Appeals ruled on how the Labor Code might or might not apply to unlimited PTO policies. In the case, an employer stated it had an unlimited vacation policy, but it was never put in writing or communicated in that manner to the employees. The employees believed they were limited to six weeks of vacation per year, though this was never formalized.

The employees filed a claim for unpaid vested vacation time, and the Court of Appeals found the employer’s policy was not truly unlimited but, instead, undefined. Leaving a vacation policy undefined does not relieve employers of their obligations under the Labor Code to pay for unused vacation time. In order for employers to avoid such payment, their unlimited policies should be in writing and make clear that the unlimited vacation is not intended to be a form of wages or compensation. Companies should also administer such policies fairly and in accordance with the spirit of the policy, such as by not discouraging employees from using PTO.

Creating an Employee Handbook

If you are an employer, it is imperative that you create a thorough and lawful employee handbook. The recent court case does suggest that employers can avoid paying out vacation pay upon termination by having a clearly written policy that makes in black and white that paid time off (PTO) is not an additional form of wages and is instead intended to offer a less rigid work schedule. The policy must make it clear that employees are obligated to schedule their own time off and will be fairly compensated. Likewise, your company must implement this policy fairly and reasonably. If all of this is handled properly, employers may not be required to pay out for unused vacation time upon termination.

Contact Our California Unpaid Vacation Lawyers Today

At Mara Law Firm, we help employees with a wide range of labor law claims, and you should not wait to call (619) 784-8775 or contact us online to learn how a California unpaid vacation attorney can help.