Your Right to Vacation Pay at Termination Under Labor Code 227.3

Vacation Pay at Termination in California Law

When California employees who have accrued vacation are terminated, their employers must pay them all vacation wages owed.

California employers are not required to provide paid vacation to their workers. But, if they do, California law treats paid vacation the same as other wages in the sense that when employees who have accrued vacation are terminated, their employers must pay them all vacation wages owed. Employers who fail to do so may be liable for all of the unpaid vacation wages, interest, and waiting time penalties.

California Labor Code section 227.3 provides, in pertinent part, as follows:

[W]henever a contract of employment or employer policy provides for paid vacations, and an employee is terminated without having taken off his vested vacation time, all vested vacation shall be paid to him as wages at his final rate in accordance with such contract of employment or employer policy respecting eligibility or time served; provided, however, that an employment contract or employer policy shall not provide for forfeiture of vested vacation time upon termination. The Labor Commissioner or a designated representative, in the resolution of any dispute with regard to vested vacation time, shall apply the principles of equity and fairness.

Legal History of Vacation Pay at Termination

Under well-settled law, “the right to a paid vacation, when offered in an employer’s policy or contract of employment, constitutes deferred wages for services rendered.” Boothby v. Atlas Mechanical, Inc., 6 Cal. App. 4th 1595, 1602 (Cal. Ct. App. 1992).. In Suastez v. Plastic Dress-Up Co., 31 Cal. 3d 774, 783 (Cal. 1982), the California Supreme Court described vacation pay as, “similar to pension or retirement benefits, another form of deferred compensation. Those benefits, too, ‘do not derive from the beneficence of the employer, but are properly part of the consideration earned by the employee.’” Id. (citation omitted).

As wages, paid vacation is “jealously protected by statutes for the benefit of employees.” Boothby, 6 Cal. App. 4th at 1595; accord Rhea v. Gen. Atomics, 227 Cal. App. 4th 1560, 1571 (2014) (California has a policy of “jealously protect[ing]” wages, and the effect of “[Labor Code] section 227.3 and Suastez” is to “prohibit any forfeiture of a private employee’s vested vacation time.”) (emphasis in original).  Furthermore, “the principles of equity and justice weigh in favor of granting relief to employees who are denied payment for earned vacation pay.” Suastez, 31 Cal. 3d at 783.

Under section 227.3, an employer is not permitted to adopt a “use it or lose it” policy under which employees’ already vested vacation time is lost if unused within a specific time period. Boothby, 6 Cal. App. 4th at 1601 (“A ‘use it or lose it’ vacation policy [that] provides for forfeiture of vested vacation pay if not used within a designated time […] is impermissible.”);  Rhea, 227 Cal. App. 4th at 1571. “Forfeit,” as that term is used in section 227.3, means that “the employer took away the employee’s vested vacation time.” Id. (emphasis in original); see also Henry v. Amrol, Inc., 222 Cal. App. 3d Supp. 1, 5 (1990) (holding that if an employer provides a vacation benefit, the employer “is not free to reclaim it after it has been earned”) (emphasis supplied). 

Thus, where an employer’s vacation policy provides for paid vacation, the employer must pay an employee any earned but unused vacation at the time of the employee’s termination.

Furthermore, if an employer’s vacation policy seeks to deprive employees of vacation benefits, “it must be clearly and expressly stated. Otherwise, it must be interpreted in favor of the employee where there is ambiguity.” Berardi v. General Motors Corp., 143 Cal. App. 3d Supp. 7, 12 (1983); see also Civil Code § 1654; RKO Radio Pictures, Inc. v. Sheridan  195 F2d 167 (9th Cir.  1952) (California law governs parol evidence in federal court).

In Sandquist v. Lebo Automotive, Inc., 1 Cal. 5th 233, 247-24 (2016), the California Supreme Court recently confirmed that ambiguities in employment agreements that are written by employers are to be construed against the employers:

Ambiguities in written agreements are to be construed against their drafters. (Civ. Code, § 1654; Rest.2d Contracts, § 206.)

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Thus, where, as here, the written agreement has been prepared entirely by the employer, it is a “well established rule of construction” that any ambiguities must be construed against the drafting employer and in favor of the nondrafting employee. Moreover, “[t]he rule requiring the resolution of ambiguities against the drafting party ‘applies with peculiar force in the case of a contract of adhesion.’”

Id. (citations omitted).

Finally, “a proportionate right to a paid vacation ‘vests’ as the labor is rendered. Once vested, the right is protected from forfeiture by section 227.3.” Suastez, 31 Cal. 3d at 784.  For this reason, once vacation time has vested, an employer cannot change the method of calculating vacation pay so as to deprive its employees of vested vacation benefits. See, e.g., DLSE Opn Letter 2003.01.28, concluding that “any change in the ‘method of calculation’ [of vacation pay] would require that the employees be paid for the time vested under the calculation method used at the time the vacation pay was accrued.”[1] Accordingly, where an employer changes its vacation policy with respect to how much an employee is paid, it can only do so prospectively. Vacation wages accrued under the old policy must be paid based upon the old method. Id.

The Statute of Limitations for Vacation Pay Claims Accrues At the Time of Termination

Defendants in vacation pay cases often contend that the statute of limitations on a claim for unpaid vacation wages runs from the date that the vacation wages were earned. This argument fails because it is based upon a case that is no longer good law.

The issue of the statute of limitations with respect to vacation was explored at length in Church v. Jamison, 143 Cal. App. 4th 1568 (2006). There, the court concluded that the statute of limitations on a claim for vacation pay under Labor Code section 227.3 accrues on the date that the employee is terminated. Id. at 1576-77.

In reaching that conclusion, Church rejected the holding in Sequeria v. Rincon-Vitova Insectaries, Inc., 32 Cal. App. 4th 632 (1995). Sequeria had held that the statute of limitations on vacation pay accrues at the time the vacation is earned. Church found that Sequeria’s holding was meritless:

In summary, (1) a cause of action for breach of contract accrues for statute of limitations purposes only after there has been a breach of the contract, (2) the point at which vacation time is earned cannot be equated to a breach of contract and, therefore, (3) the statute of limitations applicable to contracts does not begin to run when vacation time is earned. Accordingly, we conclude that the statute of limitations cannot be applied as a look-back period to limit an employer’s statutory obligation to pay for all vested vacation time that an employee did not take before the employment was terminated.

Church, 143 Cal. App. 4th 1583.

            After Church was decided, the DLSE amended its Manual to read as follows:

IMPORTANT NOTE: While vacation becomes vested as it accrues over time in accordance with the Suastez decision, the obligation of the employer to pay vacation wages does not normally occur until the employee takes vacation or his/her employment terminates. The Court of Appeal in Church v. Jamison (2006) 143 Cal.App.4th 1568 held that the statute of limitations on accrued vacation pay entitlement begins to run from the date an employer fails to pay vacation pay in breach of contract. In the case of an employee with vested vacation entitlement at termination, this is at the time final wages are due.

            No reported decision has followed Sequeira. Two additional courts have rejected it. See Andresen v. International Paper Co., 2014 U.S. Dist. LEXIS 143537, *13 (C.D. Cal. October 6, 2014) (rejecting Sequeria and finding that Church was “more persuasive than Sequeria because it represents the most recent statement from the California courts regarding the accrual of claims for vested vacation wages.”); Farris v. Int’l Paper Co., 2014 U.S. Dist. LEXIS 120167 (C.D. Cal. August 26, 2014) (same).

            Accordingly, the statute of limitations on vacation pay accrues on the date that an employee is terminated. That statute cannot be applied as a “look-back period” to limit Defendants’ obligation to pay for all vested but untaken vacation time.  The statute of limitations for a claim for unpaid vacation wages based upon a written contract is four years. Church, 143 Cal. App. 4^th 1577. 

The attorneys at Hunter Pyle Law have litigated vacation pay cases in federal courts throughout California.  If you have a questions about your vacation pay, please feel free to contact us for a free consultation.  We can be reached at 510.444.4400, or at inquire@hunterpylelaw.com.