A new California Court of Appeals decision makes employers more vulnerable to big payouts when terminating a longtime employee who has stacked up unused vacation time over the years. We’ll examine the case and give you policy tips that can help you limit the amount of accrued vacation time you may need to pay for at termination.
Terms of Employment
When John Church began working for accounting company 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 the year. If Church decided not to 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.
Two years went by, and Church and WHJ couldn’t agree on other terms for Church buying in to the company. Church demanded payment of his salary from year one, but WHJ would not pay.
Employee Sues for Unpaid Vacation–Then Malpractice
Church’s employment finally terminated after three years in May 2001. Then, in April 2002, his lawyer, Daniel O. Jamison, filed a lawsuit against WHJ in a Fresno court. The suit included, among other things, a Labor Code claim for WHJ’s failure to pay Church for the 10 days of accrued but unused vacation during the first year, plus interest and waiting time penalties. The court, however, threw out the vacation claim, finding that Church had 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.
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Expanded Vacation Liability
Now, a California appeals court has ruled that Jamison didn’t commit malpractice with respect to the vacation claim. The court explained that the time clock for filing suit for unpaid vacation doesn’t start running until the employment is terminated, in this case 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 contract (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.
Labor Commissioner Opinion Thrown Out
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 in that opinion sought payment for unused vacation time that had 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.
Practical Strategies
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. Note, too, that vested vacation must be paid out at the employee’s final rate of pay at termination.
Here’s a look at some practical ways to limit and manage your vacation liability:
- Impose vacation accrual caps. As most employers know, “use it or lose it” vacation policies are illegal in California. But you can limit vacation accrual with a policy that caps the number of vacation days an employee can accrue. You can stipulate that once an employee’s accrued vacation reaches that amount, 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. A sample vacation policy with model accrual language is available free to online subscribers.
- Cash out vacation regularly. Cash out accrued and unused vacation, either annually or on some other periodic basis.
- 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.