HR Management & Compliance

Vacation Pay: Court Expands Your Financial Responsibility for Unused Vacation; What You Can Do






Suppose you have a
dedicated, hardworking employee who is happy to skip the annual vacation because
it interferes with his or her productivity. While to some employers this may
seem too good to be true, the fact is that it’s a common scenario in today’s
hard-driving and competitive workplaces—and it could become a big liability for
you.

 

We’ll take a look at a
new California Court of Appeals decision that expands your liability for unused
vacation time that has accumulated over the years. We’ll also provide you with
vacation policy tips that can help you limit the amount you may need to pay
out.

 


The HR Management & Compliance Report: How To Comply with California Wage & Hour Law, explains everything you need to know to stay in compliance with the state’s complex and ever-changing rules, laws, and regulations in this area. Coverage on bonuses, meal and rest breaks, overtime, alternative workweeks, final paychecks, and more.


 

Employee Demands Payment

When John Church began
working for accounting firm Wilcox, Hokokian & Jackson (WHJ) in Fresno, he and the firm
had an oral agreement that Church would become a shareholder in the company
after one year of employment. They agreed that his $8,500 monthly salary would
be deferred that first year and be considered his “buy-in” into WHJ at the end
of that year. If Church didn’t purchase an interest, he would be paid the
salary for his first year. Church was also entitled to 10 paid vacation days
during year one, which he never took.

 

After the first year,
Church and WHJ couldn’t agree on terms for him to buy in to the company. They made
another oral agreement, stipulating that they would agree to final purchase
terms in one more year, and that the deferred compensation from year one would
still be applied to the purchase price.

 

When another year went
by and they still couldn’t agree on terms for Church buying in to WHJ, Church demanded
payment of his first year’s salary, but WHJ would not pay.

 

Lawsuits Filed

Church’s employment
finally terminated after three years in May 2001. His lawyer, Daniel O.
Jamison, filed a lawsuit against WHJ in April 2002 in a Fresno court. The suit included a Labor Code
claim for WHJ’s failure to pay Church for the 10 days of accrued but unused
vacation during year one, plus interest and waiting time penalties. The court,
however, threw out the vacation claim, finding that Church filed too late and
missed the statute of limitations for recovering the unpaid vacation wages.

 

Church turned around and
sued Jamison for malpractice for not filing the lawsuit sooner. Jamison argued
that the time to file the vacation claim had not yet expired when he filed the
lawsuit on Church’s behalf.

 

Termination Triggers
Time to Sue for Unpaid

Vacation

Now, a California appeals court has ruled that
Jamison didn’t commit malpractice with respect to the vacation claim.
1 The court explained that
the time clock for filing suit for unpaid vacation doesn’t start running until
the employment ends, in this case in May 2001. The court went on to explain
that an employee has between two and four years following termination to file
suit for unpaid vacation—the precise time limit depends on whether the vacation
obligation arose out of an unwritten contact (two years to file suit), written
contract (four years), or statute (three years). Under any of these scenarios, the
vacation claim—filed just 11 months after Church’s employment terminated—was
timely.

 

In reaching this
decision, the appeals court invalidated a California labor commissioner opinion
holding that the statute of limitations begins to run when vacation is earned
or accrued. The employee involved in that opinion sought payment for unused
vacation time that accrued over his 12 years of employment. The labor commissioner,
however, applying a four-year statute of limitations, limited the award to
vacation time earned within the four years before termination. The appeals
court, however, said that nothing in the Labor Code or prior case law supported
the labor commissioner’s “lookback” method to cut off liability for unpaid
vacation.

 

Note that Church also
sued for his unpaid wages from the first year as set forth in the oral
employment agreement. The court ruled that a two year statute of limitations
applied to this claim, measured from the date the wages were due. Thus,
Church’s attorney may have filed the lawsuit for unpaid wages too late, so the court
allowed Church to proceed with his malpractice suit based on the unpaid wages
claim.

 

What to Do Now

Because of this decision,
an employer’s liability for vested but unused vacation time will continue to
stack up until an employee’s termination. Thus, if a longtime employee
continually doesn’t use up all of his or her annual vacation entitlement, you
could be faced with a big payout later on representing many years of accrued
vacation. As an example, the 10 days of vacation claimed by Church added up to
$3,923, not including interest and penalties. Note, too, that vested vacation
must be paid out at the employee’s final rate of pay when his or her employment
ends. Here are four practical ways you can limit and manage vacation liability:

 

1. Impose vacation
accrual caps.
“Use it or lose it” vacation policies are illegal in California. But you can
limit vacation accrual with a policy that caps the total number of vacation
days an employee can accrue. Once an employee’s accrued vacation reaches that amount,
you can stipulate that no additional time will be earned until the accrued
vacation falls below the cap. Note that the labor commissioner says that the cap
must be reasonable, or at least 175 percent of the annual vacation entitlement.
Thus, a worker must have at least nine months after vacation accrues within which
to take the vacation before the cap kicks in.

 

2. Cash out vacation
regularly.
Cash out accrued and unused vacation, either annually or on some
other periodic basis.

 

3. Require employees to
take vacation.
Not only is this a good policy to boost employee morale and productivity,
but it can also help keep the vacation books clean.

 

4. Review vacation
benefits.
Nothing in the law requires you to offer paid vacation benefits or
a certain number of days or weeks of paid vacation per year. If you have a
generous vacation policy but find that employees can’t use up all the vacation
you offer— because of operational constraints or otherwise—it could be time to
rethink your policy.

 

You can link to this new
ruling online at www.courtinfo.ca.gov/opinions/.

 

_

1 Church v. Jamison, Calif.
Court of Appeals (Dist. 5) No. F048224, 2006

 

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