California Vacation and PTO Rules

What Employers Need to Know

Employers with California employees must understand the state's unique rules regarding vacation and paid time off (PTO). Although California law does not require employers to offer vacation or PTO, once these benefits are offered, they are treated as earned wages—triggering specific protections and requirements. Awareness of some key rules can help employers ensure compliance. 

Accrued Vacation Must Be Paid Out at Termination

Once vacation or PTO is earned, it is considered wages. All accrued but unused vacation or PTO must be paid out at termination at the employee’s final rate of pay.

Unlimited PTO policies may be an exception to this requirement and employers are increasingly adopting unlimited PTO policies in order to avoid the requirement that PTO be paid out upon termination. However, unlimited PTO policies require careful structuring to avoid the payout requirement. For more information on unlimited PTO, see the separate article on the topic.

"Use-It-Or-Lose-It" Policies Are Prohibited

California prohibits “use-it-or-lose-it” policies. Once vacation or PTO is earned, it cannot be forfeited simply because the employee failed to use it by a certain date. Any policy attempting to do so is invalid and unenforceable.

Accrual Caps Are Permitted, But Must Be Reasonable

While “use-it-or-lose-it” policies are not allowed, California does permit reasonable caps on accrual. This means an employer may stop additional accrual once the employee reaches a certain number of hours or days. This prevents employers from having to carry large vacation liabilities while still respecting employee rights. However, the cap must be designed to allow employees a reasonable opportunity to use their accrued time.

The Division of Labor Standards Enforcement (DLSE) has suggested that at least nine months must be given after vacation has been accrued to allow an employee to take the vacation that has been earned. Accordingly, it is a safe practice for employers to adopt an accrual cap that is 1.75 times the amount of PTO/vacation that an employee can accrue in a year. While not a binding rule, this guidance is widely treated as a safe harbor standard by employers and courts.

PTO, Floating Holidays, and Personal Days Are Generally Treated Like Vacation

If PTO, floating holidays, or personal days can be used for any reason without condition, they are generally treated as vacation and are subject to the same rules, including payout at termination.

Ensure Your PTO and Vacation Policies Are Compliant: Contact Chapman Legal

California’s vacation and PTO rules are not always intuitive, and non-compliance can lead to costly penalties. Employers should regularly review their policies for compliance with these laws and ensure HR teams are trained accordingly. 

If you have questions about your policies or need help crafting compliant PTO, vacation, or unlimited PTO policies, contact Chapman Legal today.