When an employer “discharges” an employee, California Labor Code section 201(a) provides that “the wages earned and unpaid at the time of discharge are due and payable immediately.” California also treats vacation and paid time off (PTO) as “wages,” as well as requires an employer to pay out accrued and unused vacation when employment ends. As a result, an employer also must timely pay accrued and unused vacation and PTO upon discharge. Employers do not have to pay out unused paid leave qualifying only as sick leave. Under Labor Code section 203, the failure to timely pay any final wages can lead to waiting time penalties of one day’s wages for each day that wages remain unpaid, up to 30 days.

But the Labor Code sections do not expressly define the term “discharge” for purposes of California’s final wage provisions, which is particularly confusing for employers with respect to temporary layoffs. The US Ninth Circuit Court of Appeals’ new decision in Harstein v. Hyatt Corporation, however, holds that employers must timely pay unused vacation and PTO at the time of a temporary layoff, as long as it does not give the employee a return date within the normal pay period. This important decision adopts the California Labor Commissioner’s position on the issue.

A Temporary Layoff, Then Termination

Harstein grew out of the COVID-19 pandemic. In March 2020, facing a common situation at the time because of a reduction in business, the employer furloughed more than 7,000 employees. Its letter to employees told them that they would be “furloughed/temporarily laid off,” but without any return date. The letter expressed hope that business would return to normal in eight to 12 weeks. The letter told employees that the company was “not separating anyone’s employment at this time.” Accrued vacation pay could be paid upon the employee’s request, but further accrual would stop during the furlough. The letter further stated health benefits would continue through April and May 2020.

After business did not improve, the employer sent a second letter in June 2020. It informed employees that “your furlough will become a layoff effective June 27, 2020,” with employment “terminated as of that date.” The employer stated it would pay out all accrued vacation as of the termination date.

Lawsuit Alleging Late Final Vacation Pay

A former employee filed a putative class action lawsuit in Los Angeles County Superior Court. She asserted claims under California law for failure to pay all wages upon discharge, waiting time penalties, failure to furnish accurate wage statements, unfair business practices, and for civil penalties under the Private Attorneys General Act (PAGA). The employer removed the case to federal court, which granted class certification.

Later, the federal district court granted summary judgment in favor of the employer, dismissing the employee’s claims. It ruled that the March 2020 furlough was not a termination within the meaning of California Labor Code section 227.3, which generally requires an employer to pay an employee for “vested vacation time” when “an employee is terminated.” The federal district court concluded that the furlough was not a termination under the law, because there was not a complete severance of the employer-employee relationship at the time.

Furlough, or Temporary Layoff, Requires Payout

On appeal, the Ninth Circuit reversed, reinstating the employee’s lawsuit. It concluded that the Labor Code’s prompt payment provisions required the employer to pay employees for accrued and unused vacation at the time of the furlough, or temporary layoff, in March 2020 – not when the employer officially terminated employment later.

The Ninth Circuit rejected the district court’s reliance on Labor Code section 227.3, rather than California’s provisions dealing with when an employer owes final wages. The Ninth Circuit held that Labor Code section 227.3 “addresses whether accrued vacation pay constitutes wages that are due to the employee at termination – not when those wages are due.”

To resolve the question of when payment was due, the Ninth Circuit looked to Labor Code section 201(a) and when a “discharge” happens. More specifically, the court faced the question of “whether a temporary layoff, with no specified return date, is a discharge for purposes of” Labor Code section 201(a).

With no California case law addressing the question, the Ninth Circuit deferred to the Labor Commissioner’s interpretations of California law and case law. That agency’s opinion letters and policy manual expressly address when a temporary layoff should be treated as a termination of employment. Under the Labor Commissioner’s interpretations, a layoff “without a specific return date within the normal pay period” constitutes a discharge, with final wages (including unused vacation or PTO) due immediately. The “normal pay period” would be the same pay period.

Takeaways for Employers

The Harstein decision is significant. It makes clear that employers must pay out accrued vacation or PTO whenever they furlough or lay off employees, when there is no specific return date within the normal pay period. The description that an employer gives to the event (e.g., “furlough,” “temporary layoff,” or something similar) does not matter. Nor does it change the situation when the employer continues benefits for a time or does not give notice of actual termination until later. Instead, as Harstein makes clear, the important fact is whether the employer gives the employee a return date within the normal pay period.

Furthermore, while Harstein arose from the COVID-19 pandemic, the holding is not so limited. It means that an employee temporarily laid off for any reason (for example, as a result of a reduction in force, even unrelated to the pandemic or other emergency) must be paid accrued vacation or PTO at the time of layoff. Under California’s final wage requirements, that event constitutes a “discharge,” requiring immediate payment of final wages – even if the employer intends to have the employee return after the current pay period. If an employer needs to temporarily lay off employees, it should try to give a specific return date within a normal pay period to avoid having to pay final wages immediately.

Finally, the Harstein decision concerns more than having to timely pay vacation or PTO upon a temporary layoff. It involves final pay requirements more generally. Thus, if an employer temporarily lays off an employee without a return date in the normal pay period, the employer must pay all final wages immediately – not just accrued vacation or PTO.