California employers are familiar with the state law making “use it or lose it” vacation policies unlawful, so you must pay employees any unused, accrued vacation upon termination of employment. But what is a vacation policy? Is all paid time off considered “vacation”?
The California Court of Appeal recently considered for the first time whether a sabbatical constitutes vacation under state law. Guest columnist Cathleen Yonahara of Freeland Cooper & Foreman, LLP, in San Francisco explains the case.
Employer Establishes Paid Sabbatical Program
Advanced Micro Devices, Inc. (AMD), established its sabbatical program in 1988. Under the original program, all full-time salaried employees were eligible for an eight-week sabbatical after seven years of service. According to the program, employees “who terminate and have not taken their sabbatical forfeit their eligibility.”
AMD revised the sabbatical policy twice. In 2006, it changed the program to allow eligible employees the option of taking their sabbatical as two four-week leaves. In 2007, it shortened the length of the sabbatical to four weeks after five years of service. AMD ended the sabbatical program in 2009.
The purpose of the sabbatical program was to “encourage continued employment with [AMD] by providing time away from work for enrichment and revitalization.”
AMD also had a vacation policy. Employees earned two weeks of vacation per year for the first two years of service, and the benefit increased based on years of service, with the maximum annual entitlement of four weeks coming at the beginning of the eighth year. Employees with eight years of service could accumulate up to eight weeks of vacation.
Departing Employee Not Compensated for Unused Sabbatical
Eric Paton worked for AMD as a salaried employee from 1997 to 2005. During his first interview with the company, the interviewer described the sabbatical program as “a nice little perk.” After working for AMD for more than seven years, Paton requested a sabbatical, but was asked to defer it for business reasons.
He was later placed on a performance improvement plan, which disqualified him from taking a sabbatical until he satisfied the required performance standards. He thought the improvement plan’s goals were unobtainable and quit. AMD didn’t compensate him for the eight-week sabbatical he had not used.
1,432 Employees Sue; Claim Sabbatical was Vested Vacation Time
Paton filed a class-action lawsuit against AMD for failing to pay him and other employees for the eight-week sabbatical they had earned but not used by the time of their termination.
Paton argued that the sabbatical program was really just extra vacation and that, under California Labor Code Section 227.3, an employer may not require an employee to forfeit vested vacation pay.
He further claimed that class members who had worked for less than seven years were entitled to be paid for a pro-rata share of the unused sabbatical in proportion to the time they had worked.
The trial court certified the case as a class action. The class consisted of 1,432 salaried AMD employees terminated after April 2003 who weren’t paid for a sabbatical benefit that was unused upon termination. AMD asked the court to dismiss the case without a trial on the grounds that the sabbatical benefit was not “vacation” within the meaning of Labor Code Section 227.3.
The trial court agreed and dismissed the case. Paton appealed.
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When Is Paid Sabbatical Really Vacation?
You aren’t required to offer paid vacations, but if you do, Labor Code Section 227.3 requires that upon termination of employment, all unused and vested vacation must be paid to the employee as wages at his/her final rate of pay, and your policy may “not provide for forfeiture of vested vacation time upon termination.”
The issue was whether AMD’s sabbatical policy was a legitimate sabbatical or regular vacation within the meaning of Section 227.3. What is “vacation” within the meaning of the statute?
The appellate court defined “vacation” as:
paid time off that accrues in proportion to the length of the employee’s service, is not conditioned upon the occurrence of any event or condition, and usually does not impose conditions upon the employee’s use of the time away from work.
The appellate court contrasted vacation with paid time off that is conditioned on the occurrence of a specific event or granted for a particular purpose, such as paid holidays, paid sick leave, or paid bereavement leave. An employee’s right to those types of conditional leave vests when the reason for the leave arises and the employee is required to use the leave for the identified purpose.
Similarly, traditional sabbatical leave is a conditional type of paid leave given to a university professor for study or travel for an academic semester or year to engage in a project intended to promote his professional development.
Thus, traditional sabbaticals are conditional leaves the employee is expected to use for an identified purpose, they encourage employees to continue to work for the institution, and they provide opportunities for professional growth.
On the other hand, sabbatical programs used by businesses in the private sector are typically shorter and more frequent than traditional academic sabbaticals and don’t require the employee to have any particular purpose. The leave is given for employees to simply “recharge their batteries.
4 Factors That Distinguish Sabbatical from Vacation Time
The appellate court identified four factors that tend to show that a sabbatical program is a legitimate sabbatical benefit and not regular vacation:
1. Sabbatical offered after seven or more years. Leave that is granted infrequently supports the claim that it is intended to retain experienced employees who have devoted a significant period of service to the employer. Traditionally, a sabbatical is granted for every seven years of employment.
An interval of seven years is generally sufficient for an employee to gain experience and demonstrate expertise that an employer may wish to retain. The court observed that more or less frequency may be appropriate, depending on the particular industry or company.
2. Sabbatical longer than what’s offered as vacation. The length of the leave must be adequate to achieve the employer’s purpose. This case deals with unconditional sabbaticals given for the purpose of reenergizing employees. Since regular vacation time also may be used for that purpose, the length of the sabbatical leave should be longer than that normally offered as vacation.
3. Employer must also provide competitive paid vacation. According to the appellate court, “because an employer could offer a minimal vacation plan and reward senior staff with sabbaticals as a way to avoid the financial liability of a more generous vacation plan, the employer’s regular vacation policy should be comparable to the average vacation benefit offered in the relevant market.”
4. Employee must be required to return to work. Because a sabbatical is designed to retain valued employees, a legitimate program must require that an employee taking a sabbatical return to work for the employer after the sabbatical ends.
The appellate court found that an employer need not limit eligibility for a sabbatical program to upper management or professional employees. Rather, it may offer the program to all employees.
According to the court, the real issue is “whether the leave is compensation earned over the course of the employment, the enjoyment of which is deferred, or whether the leave is intended to retain the most experienced or valued employees and to enhance their future service to the employer.”
So what did the court ultimately decide in the AMD case? Tune in tomorrow and find out.
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