California Courts Rule on Statute of Limitations for Vacation Pay Claims and Use of Vacation Time to Cover Partial Day Absences of Exempt Employees.

September 07, 2007
The California Court of Appeal has recently issued two decisions that are of importance to California employers. One deals with the appropriate statute of limitations for claims of unpaid vacation pay on termination. The other holds that using accrued time to cover partial day absences of exempt employees does not destroy their exempt status.

In the first of these cases, Church v. Jamison, [1] the California Court of Appeal in Fresno confronted issues relating to the statute of limitations for a claim made by a terminated employee for vacation pay on termination. California Labor Code section 227.3 entitles employees to receive on termination the cash value, at their final pay rate, of all earned and unused vacation time. Forfeitures of accrued vacation time are prohibited. Federal law has no provision whatsoever dealing with vacation pay or accrual.

In this case, Church brought a malpractice action against his attorney, Jamison, alleging that Jamison had been negligent by not filing Church’s vacation pay claim until after the applicable statute of limitations had expired. The Court looked at the statute of limitations question for two purposes. The first was to determine the time period after termination in which a claim for unpaid vacation pay must be asserted. The second was to determine whether a statute of limitations limits the amount of vacation pay an employee can recover which remained unused over a number of years of employment.

The Court declined to answer the first question directly, because Jamison had filed Church’s claim within one year of Church’s termination, and thus within any potentially applicable period of limitations. (In an unpublished portion of the decision, the Court of Appeal suggested that a two year statute of limitations would apply.) However, the Court held that there is no statute of limitations limiting the amount of back vacation an employee can seek at termination. Thus, the terminated employee may seek pay for all earned but unused vacation regardless of when it was accrued. Section 227.3 provides that, when an employee is terminated without having taken off all accrued vacation time, "all vested vacation shall be paid" as wages.

Many employers allow employees to continue accruing vacation from year to year over many years. These employees, when they eventually leave the job, might have hundreds of hours of vacation on the books. Based on this decision an employer must pay off the entirety at the employee’s final hourly rate, even if some of the vacation may have been earned when the employee had a much lower pay rate. Few employers budget or set aside money for these sorts of vested but unfunded liabilities.

The Court in this case rejected a 1995 decision, Sequeira v. Rincon-Vitova Insectaries, Inc., [2] which had reached a contrary result.

Here are two suggestions for avoiding this sort of catastrophic obligation.

1. You may pay off at the end of each year any vacation which has been earned but not taken. This prevents an employee from growing a substantial bank of leave time.

2. While forfeitures of vested vacation time are unlawful, you may place a cap on the number of vacation hours an employee can earn. Once the employee reaches that cap, they earn no further vacation until they have taken time off and reduced their leave bank below the maximum. At that point they are permitted to begin accruing once again, but can only accrue up to the cap. This measure, which has been approved by the California courts, also caps an employer’s potential obligation for unpaid vacation pay.

Please note that, for represented employees, a change in the handling of vacation may require negotiations with employee unions.

In the second case, Conley v. Pacific Gas & Electric Company, [3] the California Court of Appeal in San Francisco dealt with an issue relating to exempt employees (executive, professional and administrative employees who can legitimately be salaried and not receive overtime compensation) and whether an exemption would be lost if the employer charged partial day absences against vacation leave.

A group of employees brought a class action against PG&E for unpaid overtime. PG&E had classified the employees as exempt. The company had a practice of charging an employee’s vacation bank if an employee was absent for only part of a workday. The employees complained that this practice alone prevented PG&E from considering them as exempt.

The Court of Appeal disagreed, holding that the employee still could be exempt notwithstanding this practice since, because they were receiving vacation pay to cover the number of hours of their absence, they still received their full weekly salary. [4] (PG&E had conceded that, if the employee did not have any accrued vacation, the company could not dock their pay without destroying the exemption.)

This decision creates some flexibility for California employers to deal with exempt employees who are absent from work for partial days (for reasons other than sick leave, FMLA and the like) by allowing the employer to deduct from the employee’s bank of accrued sick leave to the extent necessary so that the employee will not suffer a reduction in pay for the week in which the absence occurs. The employees had argued that the PG&E could not make this sort of deduction since it resulted in them receiving less than their full weekly salary. As stated, the Court of Appeal disagreed and held that the employees in this situation did receive their full weekly salary, even though their vacation banks were drawn down to cover the partial day absence.

This article was written by Jeffrey C. Freedman, a partner with Liebert Cassidy Whitmore, a labor and employment firm. For more information regarding the firm, visit www.lcwlegal.com

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