McPherson v. EF Intercultural Fndn., Inc., 47 Cal. App. 5^th 243 (2020)

In this case of first impression, the California Court of Appeal affirmed the trial court’s judgment (except for the amount of damages and attorneys’ fees awarded) and held that the unlimited vacation policy at issue in this case was not as described and that the employer (EF Intercultural Foundation) owed the plaintiffs for certain accrued but unpaid vacation benefits. Importantly, however, the court did not determine that an unlimited vacation policy (if correctly applied) would necessarily violate California law: “We by no means hold that all unlimited paid time off policies give rise to an obligation to pay ‘unused’ vacation when an employee leaves.”

The defendant, EF Intercultural Foundation, is a nonprofit that runs organizational and cultural exchange programs between the U.S. and other countries. Three former employees — area managers who ran seasonal homestay programs for international students and who worked from home and in the field — brought an action against EF Intercultural, claiming that they were entitled to accrued vacation pay upon separation under its ostensibly unlimited vacation policy. While EF Intercultural included a vacation policy in its handbook, which provided a specified number of vacation days for certain salaried positions, the vacation policy that applied to these particular plaintiffs was untracked and unwritten. The employees did not accrue vacation days and were only required to notify a supervisor before taking time off. EF Intercultural argued that this was an unlimited vacation policy that did not result in any accrual of benefits or require any payment upon termination.

The court distinguished EF Intercultural’s policy from a truly unlimited vacation policy and essentially sidestepped the question of whether a properly administered unlimited vacation policy would require payout of anything upon termination: “We need not decide whether vacation wages are earned under an unlimited policy — whether ‘uncapped time off’ equate[s] to ‘vested vacation’ — as that is not the policy here.” The appellate court held that although EF Intercultural characterized its policy as unlimited, its actual practice was to give plaintiffs a fixed amount of vacation time with an implied limit of two to four weeks, which was really no different from the amount of PTO provided to other corporate employees under the policy set forth in the handbook.

Even though the court limited its holding to EF Intercultural’s specific vacation policy and practice, noting the “particular, unusual facts of this case,” it provided helpful guidance for employers that already have implemented or are considering adopting an unlimited vacation policy. The court determined that such a policy may relieve an employer from having to pay out any accrued vacation benefits upon separation if, in writing, it:

1. clearly provides 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. spells out the rights and obligations of both employee and employer and the consequences of failing to schedule time off;

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

4. 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.

Another problem with EF Intercultural’s policy was its informal nature — it was not described in writing and was instead communicated informally by way of “side conversations” between employees and their supervisors. If an employer is going to maintain an enforceable unlimited vacation policy, it must be memorialized in writing and should fully describe the benefits to the affected employees as well as the potential that they will leave money on the table by working more hours for the same pay than those who scheduled more PTO.