On April 1, 2020, the California Court of Appeal issued the first published decision addressing unlimited vacation policies under California law.  “Unlimited” vacation policies in which employees have no minimum and no maximum vacation and do not accrue any vacation time have become increasingly popular in recent years.  However, without guidance from the courts, employers that have implemented these policies have faced legal uncertainty.  In McPherson v. EF Intercultural Foundation, Inc., the court held that the employer’s purported “unlimited” paid time off policy violated Labor Code Section 227.3 based on the particular facts of that case.  Since the court limited its ruling based on the facts in McPherson, it left open many questions regarding the lawfulness of unlimited vacation policies generally.  Fortunately, the court also provided example features of an unlimited vacation policy that it suggested might not violate Section 227.3.  Nevertheless, this newly published decision may have opened a door for more litigation and we recommend employers review their flexible/unlimited time off policies.

California Vacation Laws

California and federal laws do not require employers to provide employees with paid vacation.  Whenever an employer does have a policy providing paid vacation, however, such policy is governed by contract law.  In California, a vacation policy must also comply with Labor Code Section 227.3, which requires the employer to pay as wages any “vested” vacation time a terminated employee has accrued but not used.

McPherson v. EF Intercultural Foundation, Inc.

In McPherson, the plaintiffs sued EF Intercultural Foundation (“EF”) alleging that it failed to pay accrued but unused vacation wages at termination.  The plaintiffs had worked as full-time, exempt area managers in one of EF’s divisions.  EF had a written vacation policy in its employee handbook giving certain employees a fixed amount of vacation days per month based on their length of service.  This vacation policy, however, did not include a written policy as to its unlimited vacation practice for full-time exempt area managers.  Instead, plaintiffs could take undefined time off with pay, but they did not accrue vacation days.  As is common with vacation policies, Plaintiffs were required to notify their supervisors before taking time off.

After a bench trial, the trial court concluded that EF was liable to plaintiffs for vacation wages, as it had a policy that provided for paid vacation under Section 227.3.  EF appealed the trial court’s ruling.  The Court of Appeal affirmed the trial court’s order except with respect to one of the plaintiffs, who the court found was not entitled to recover under California’s Section 227.3 after she moved to Virginia.  The court found that EF owed plaintiffs vacation wages under section 227.3 because EF’s “unlimited” vacation policy was not unlimited in practice, and the unlimited nature of the policy was not conveyed to plaintiffs in writing.

The Court of Appeal expressly limited its holding to the facts of the case.  The court recognized the appeal of flexible time off and unlimited vacation policies to employees and provided features of an example policy that may not trigger Section 227.3:

1. In writing;
2. Clearly provides that employees’ ability to take paid time off is not a form of additional wages for services performed, but as 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;
3. Spells out rights and obligations of both employee and employer and the consequences of failing to schedule time off;
4. In practice allows sufficient opportunity for employees to take time off, or work fewer hours in lieu of taking time off; and
5. Is administered fairly so that it neither becomes a de facto “use it or lose it policy” nor results in inequities.

Key Takeaways

Having a carefully drafted “unlimited” or flexible vacation policy is particularly critical in light of recent events relating to COVID-19, as many employers have placed employees on furlough or terminated their employment, or are considering doing the same.  In such circumstances, it is important for the applicable policy to expressly state the obligations of the employer and the employee, the conditions of eligibility and use, and the limitations of such policy.

Employers that have “unlimited” paid time off policies or are considering implementing such policies are encouraged to evaluate or update such policies to avoid unwanted wage obligations.  For example, since most (if not all) “unlimited” paid time off policies are not truly unlimited in practice, such policies can be renamed as “flexible” time off policies instead, with corresponding policy provisions.  Further, companies may wish to consider revising such policies to reflect flexible vacation (as opposed to paid time off) policies to avoid the ambiguity of using of such policies for prolonged sick or health related leaves; or, alternatively, to provide clear conditions of use of any paid time off policies for prolonged sick or health reasons.  Finally, any such policies should be drafted keeping in mind the features the McPherson court provided above.