Administering a PTO policy in California

When administering a PTO policy in California, it’s important to understand how the law treats the accrued days in the PTO bank. This matters for California employers since accrued vacation days are treated as accrued wages and must be paid out upon termination. As such, the same rules apply to any PTO time that is the legal equivalent of vacation time.

PTO policy pitfall: Is PTO time vacation time?

“If the employee can take the time off without condition, it is vacation, no matter what it is called.” Dan Chammas advised in a recent CER webinar. This means that laws that govern vacation days will apply, regardless of what the employees actually use the time for.

This becomes an issue for employers when they create one big PTO bank that employees are expected to use for every type of leave including vacation days, sick days, jury duty, pregnancy disability leave, holidays, doctor’s appointments, etc. Since this PTO bank is meant to cover every possible type of leave, it is usually a very large bank of days.

“But California is very clear on this. The rule is, in California, is if the employee can use all of it for vacation, then it is all considered vacation. Then the state treats it as vacation wages—even if the employee never uses any of it for vacation.” Chammas confirmed.

The key question to make a distinction within the law is this: what limitations does the employer put on the leave bank? If there are no limitations, then it is all vacation for legal purposes. A lot of employers get in trouble this way. However, if the employer places restrictions on the use of the PTO bank (perhaps by designating which portions can be used for which types of leave), then it would be treated differently under the law.

This is an administrative pitfall to avoid when setting up a PTO policy—be sure to understand that designating everything as PTO without restriction will have consequences.

PTO policy pitfall: Must accrued PTO time be paid upon employee termination?

The biggest reason that this distinction (whether or not PTO time is viewed as vacation time under the law) matters is because California law says that vacation time is vested wages. In other words, once a leave bank has been identified as vacation, California looks at the time as hours of pay that the employer owes the employee. In other words, accrued vacation is looked at as wages earned by an employee to be paid while he is not working.

California law also states that employers cannot take away vacation wages. In other words, employers cannot reduce the vacation banks of employees once they are accrued. In fact, no “use it or lose it” vacation policies are allowed. Once an employee earns vacation wages, the employer must eventually pay it out—the payout may occur while the employee is on vacation, or at any other time.

If vacation is still accrued and unpaid at the time of termination, then the employer must pay out those vacation wages at that time. (California has a rule that all wages are due on an employee’s final day of employment). This also means that accrued vacation will be paid at the current rate of pay, as opposed to the rate of pay at the time it was earned—so, years of vacation earned at a lower wage rate become much more valuable when paid out at an elevated rate.

The above information is excerpted from the webinar “Paid Time Off in California: Strategies for Effectively and Legally Managing Your Program.” To register for a future webinar, visit CER webinars.

Daniel B. Chammas, Esq., is a partner in the labor and employment practice group in Venable’s Los Angeles office. He has extensive experience defending employers in wage and hour class actions and other employment disputes, from actions for unpaid wages and sexual harassment claims to wrongful termination litigation and racial discrimination complaints.