Summer is around the corner and your employees are likely planning vacations. There is no legal requirement for most employers to offer vacation or paid time off (PTO), but employers usually offer one or the other of these benefits to attract and retain employees.

Once you’ve chosen to offer one of these benefits, different laws apply to how you administer the benefits. The applicable law(s) may help you decide which one(s) you want to include in your benefits package.

Vacation, PTO and California Law

PTO can be any combination of paid sick leave, paid vacation time and paid holidays. The employer’s policy determines the type of benefits that are combined in PTO benefits.

PTO policies are typically more generous in terms of the amount of time provided, as the PTO will be used for any absences, whether sick leave and vacation, sick leave, vacation and holidays, or other combinations of absences, such as personal time off, appointment time and such.

Vacation and PTO are considered a form of wages that employees “earn” by working. Employers determine the amount of vacation or PTO that employees will earn, usually based on years of service. Employers may start the “accrual” at any time after the employee begins working, whether it’s immediately upon hire or after a specific time of continued employment.

Once the employee has earned the vacation/PTO time, it belongs to the employee and cannot be lost. Thus vacation and PTO must accrue, vest and be paid out at termination.

You cannot use an accelerated plan that provides more vacation or PTO for employees who work less time.

For example, employees who begin working for you anytime during the year could earn up to 10 days of vacation, and employees who have worked for you for a year earn up to 10 days of vacation. In order to accrue 10 days of vacation, the person who starts working for you in July would accrue 1.67 days of vacation per month. The person who worked all 12 months in the following year would accrue at a lesser rate of 1.20 days per month. This is not a permissible accrual plan, as the accrual is reduced in the second year of employment.

Your policy determines who earns vacation or PTO. You can provide such a benefit only to your regular full-time employees (you can define “full time” as 40 hours or more per week, 32 hours per week or other number of hours), or you can provide a pro-rated amount of the benefit for part-time employees.

Your policy designates the amount of vacation or PTO to be earned for each hour worked. Part-time employees, such as those working more than 20 hours but less than 40 hours per week, might earn a pro-rated share of vacation or PTO for every hour worked. Note that an opinion letter from the California Division of Labor Standards Enforcement (DLSE) confirms that state law requires that vacation be earned and vested on at least a day-by-day basis. (Suastez v. Plastic Dress-Up Co., 31 CA 3d 774 (1982); DLSE Opinion Letter 1993.08.18)

Caps on Accrual

Vested vacation and PTO must be paid out at termination at the employee’s current rate of pay, which is usually higher than when the employee earned the vacation or PTO. You can avoid a large financial liability for unused vacation or PTO by capping the amount that can be accrued.

Vacation and PTO caps may be used to limit the amount of time off, but the cap must be reasonable — in terms of the amount of the cap relative to the accrual, and the time period during which the employee has to use any accrued time off. The more vacation or PTO that an employee can accrue, the higher the cap on accrual should be, and the longer the period of time the employee may need to use the vacation or PTO.

Time Off For Other Reasons

Providing “flexible” time off, personal time off, floating holidays or other paid time off that is not tied to a specific date or event is a great benefit for employees. However, this type of benefit is also considered to be a form of vacation or paid time off and therefore must accrue and be paid out at termination, if not used.

Federal Exemption

A federal law does create an exception to the accrual and vesting of vacation or PTO for some employers. The Employee Retirement Income Security Act (ERISA) pre-empts California law if the employer’s plan is covered by ERISA; if the time off benefit is paid out through a trust rather than through the general assets of the employer; and if there is some investment and management of the plan’s assets.

Author: Gail Cecchettini Whaley

HR Watchdog, HRCalifornia’s Employment Law Blog, © California Chamber of Commerce