California Court Issues a Warning for Employers

This year has required a seemingly endless series of updates to employer policies in areas like unpaid leave and paid sick leave. But a court case from last spring, flying under the radar for some employers scrambling to adjust to the pandemic, identifies yet another policy for companies to review and potentially amend.

In an April 1, 2020 decision, the appellate court, in McPherson v. EF Intercultural Foundation, Inc., issued a warning to employers currently offering unlimited paid vacation or time off. The case involved prior employees of the EF Intercultural Foundation, Inc., who sued their former employer for unused paid vacation hours after termination.[1] The foundation argued that these employees had been offered unlimited vacation, and so had not accrued any payable time off.

The court found in favor of the employees for several reasons. First, despite the foundation’s assertion that the employees had access to “unlimited” vacation, the plaintiffs actually had only a typical amount of vacation available because they were not approved for longer periods of time off than other employees who had limited vacation. Also, the court noted that the practical realities of employment prevented these employees from taking a large amount of vacation in a year, or even any vacation during  specific periods of time when employees “worked more than 100 hours a week, seven days a week, up to 18 hours per day."

The court also noted that the employer had no written policy memorializing the “unlimited” vacation, and had never warned employees that, if they failed to schedule sufficient time off, they would essentially be forfeiting their paid vacation benefits (since no accrued but unused vacation payout would be forthcoming).  

What does this mean?

In certain cases, employers currently offering “unlimited vacation” or “unlimited time off” may still be required to pay for unused vacation when employees leave the organization.

The court made clear that its findings were based only on the particular details of this case. However, the decision did offer four general, though incomplete, guidelines for employers who would still like to offer unlimited time off, but want to avoid liability for unexpected termination pay outs. The first two guidelines apply to what an employer must include in their clearly written policy. The second two apply to how the employer administers the policy in practice.

In the words of the decision, an employer offering unlimited time off is more likely (though not certain) to avoid termination liabilities if it:

1. clearly provides [in writing] that employees' ability to take paid time off is not a form of additional wages for services performed, but perhaps part of the employer's promise to provide a flexible work schedule—including employees' ability to decide when and how much time to take off;[2]

2. spells out [in writing] the rights and obligations of both employee and employer and the consequences of failing to schedule time off;[3]

3. in practice allows sufficient opportunity for employees to take time off, or work fewer hours in lieu of taking time off; and

4. [ensures its policy] is administered fairly so that it neither becomes a de facto "use it or lose it policy" nor results in inequities, such as where one employee works many hours, taking minimal time off, and another works fewer hours and takes more time off.

Some legal experts suggest that the court’s decision also implies that, in order for a time off policy to be truly “unlimited,” and to avoid claims of disability discrimination, businesses must allow employees to use their time off for anything -- even leaves of absence that would normally be unpaid and might go on for months -- and should avoid implying a limit to the amount of time employees can take off.

Recommended next steps

In any case, employers should be aware that having too many rules around when and how employees can use unlimited time off makes the employer vulnerable to a claim that employees are actually owed a vacation payout at the end of employment, due to having a de facto limited time off policy.     

To exercise the utmost caution, some employers may simply choose to opt for an accrued vacation policy, rather than an “unlimited vacation” plan which could lead to unexpected liabilities when employees move on.

Another option would be to allow employees to accrue legally required sick time in accordance with their local or state requirements and to hold “unlimited vacation” as a separate policy.  This option, though not fail-safe, at least allows employers to prohibit unlimited vacation being used for what would normally be unpaid leave, when an employee is unable to do any work even if her or his job urgently requires it.

This option allows an employer to limit the most harmful circumstances in which an unlimited time off policy could be abused[4] without appearing to put tight parameters around how “unlimited time off” can be used.  Even using this solution, however, employers should carefully follow the four suggestions laid out above for the best chance of success, and should make sure employees understand that not taking vacation is akin to forfeiting a cash payout of unused vacation at the end of employment. 

[1] California Labor Code section 227.3 requires employers to cash out unused vacation (or paid leave with vacation characteristics such as PTO) when employees leave their employment.

[2] I.e. If an employer cannot equally afford an employee to take two weeks versus five weeks of vacation a year -- so long as the employee gets his or her work done -- they may not want to use this kind of policy.

[3] This must include notice that, if employees do not schedule sufficient time off, they will forfeit paid vacation time, and will not receive a cash benefit at the end of employment.

[4] If, for example, the unpaid leave went on for months, and the employer was paying for leave while suffering the absence of a key worker.

Author: Diana Maier, Partner.

The Maier Law Group is a boutique employment and data privacy firm that specializes in conducting workplace investigations, providing executive coaching, training employees, mediating both courtroom and workplace disputes (between two conflicting employees), and advising and counseling employers on HR and data privacy issues.

This article has been prepared for general informational purposes only and does not constitute advertising, solicitation, or legal advice. If you have questions about a particular matter, please contact the Maier Law Group directly at info@maierlawgroup.com.