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. 4th 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.
Perez v. U-Haul: Employers cannot compel arbitration of standing issue in PAGA cases
Some companies continue to try to force employees to arbitrate their individual PAGA claims before bringing their representative PAGA claims in court. Two appellate decisions make it crystal clear that California courts have rejected these efforts, and that workers are not required to litigate PAGA claims in multiple forums.
By way of background, in Iskanian v. CLS Transportation, the California Supreme Court held that employers could not compel plaintiffs to arbitrate their representative PAGA claims. In the wake of that case, some defendants began to argue that where workers had signed an arbitration agreement, they should be required to arbitrate their individual claims before proceeding with their representative claims in court. (more…)
California Wage Statements and Exempt Employees
California Labor Code section 226 requires that an employer provide its employees with wage statements, sometimes known as pay stubs, when it pays their wages. Section 226(a) provides a list of the specific information that must be included in wage statements. Employers that ignore these requirements face liability both under section 226(e), and, through PAGA, under section 226.3.
One of the requirements of section 226(a) is that the employer state the total number of hours that an employee worked. This requirement is important for most employees, because it is the most effective way to figure out whether you are paid for all hours worked. But what about employees who are not paid by the hour, like salaried employees or employees who are paid on a commission basis? (more…)
Some Real Data Regarding the Gig Economy-and What It Tells Us About the Future of the U.S. Economy
It feels like the “gig economy” (also referred to euphemistically as the “sharing economy”) has taken over. Uber, Grubhub, TaskRabbit, wherever you look, it seems like employees are being replaced by independent contractors or temporary workers who are being exploited by internet-based companies. This perception is stoked by predictions in the tech industry, such as Intuit’s recent claim that by 2020, 43 percent of workers will be employed in the on-demand labor market. (Of course, Intuit markets its products to “on-demand employers,” so such predictions should be taken with a grain of salt.)
A tectonic shift of this nature would upend the way that we think about work and wages. Among other things, independent contractors are not subject to many wage and hour requirements, such as overtime and the minimum wage. And temp workers often struggle to piece together a livable income from multiple sources of employment. (more…)
PAGA and Intervention: Replacing a Plaintiff Who Wants Out
One of the seminal cases in the world of California’s Private Attorneys General Act, or PAGA, is Iskanian v. CLS Transportation. Iskanian wound its way up to the California Supreme Court, which ultimately held that arbitration agreements that attempt to limit a plaintiff’s right to bring PAGA actions are unenforceable.
Now Iskanian is back in the news. After years of struggle, the plaintiff, Mr. Iskanian, decided that he did not want to proceed with the case. (It is unclear why he reached that decision.) In an interesting twist, he then filed a motion, representing himself, to dismiss his individual claims (which were being arbitrated) as well as his PAGA claims. His attorneys then sought to replace him with Mr. Frost, another individual from the group of limousine drivers that Mr. Iskanian belonged to. (more…)
New PAGA Rules Take Effect July 1, 2016
Governor Jerry Brown’s budget for 2016-17 contains several significant amendments to the procedural requirements of the Private Attorneys General Act, or PAGA. These amendments apply to PAGA cases filed on or after July 1, 2016. They are limited to cases alleging violations of the California Labor Code provisions listed in Labor Code section 2699.5.
The amendments fall into four large categories: (1) the cost and procedure for filing a PAGA action; (2) the timing of PAGA actions; (3) what information and documents must be provided to the Labor and Workforce Development Agency, or LWDA; and (4) the procedure that an employer must follow to cure PAGA violations. Each amendment goes into effect on July 1, 2016, and does not affect PAGA notices filed before that date.
First, PAGA notices will require a filing fee of $75, and must be submitted both online and by certified mail.
Second, the LWDA, will have longer to review PAGA notices in order to decide whether to investigate the allegations. If the LWDA does not intend to investigate, it shall notify the employer and the employee within 60 days of the postmark date of the PAGA notice. If the LWDA does not provide any such notice, plaintiffs must wait until 65 days after the postmark date of the notice to file suit. (The current rule is 33 days.)
If the LWDA intends to investigate a PAGA complaint, it has 65 days from the postmark date of the notice to inform a plaintiff and his or her employer that it intends to do so. The LWDA then has 120 days to conduct that investigation. The 120 day period can be extended by an additional 60 days.
Third, a plaintiff will need to serve the LWDA with a copy of his or her PAGA complaint. And, if the plaintiff settles his or her PAGA claims, the plaintiff must notify the LWDA of that settlement by providing a copy of the proposed settlement. That must occur when the plaintiff notifies the court of the settlement in order to seek approval under Labor Code 2699(l). (That section requires a court to review and approve any proposed PAGA penalties.) The plaintiff must also provide a copy of any order that denies or approves any PAGA settlement to the LWDA.
Finally, any employer that seeks to cure any PAGA violations must submit its notice electronically.
These amendments follow on the heels of AB 1506, which, as of October 2015, permit employers to cure certain defects on the wage statements that they issue to their employees. In particular, employers are given 33 days to cure defects regarding the dates of the period for which the employees are paid. They can also cure defects regarding the name and address of the employer. However, the burden on an employer seeking to cure these defects is significant: it must provide fully compliant wage statements to each aggrieved employee for each pay period during the three years prior to the date of the notice to the LWDA.
Significantly, the new amendments do not contain additional funding for the LWDA to increase its involvement in PAGA actions. As a result, at least for the immediate future the responsibility for enforcing PAGA claims will continue to rest with plaintiff side employment attorneys.
Commonality, Damages, and Representative Evidence: The Ninth Circuit Properly Cabins Dukes and Comcast, and Underscores Tyson Foods
Over the past decade or so, higher court rulings regarding class actions have tended to dramatically favor either corporations or workers. Corporations have arguably scored the most significant victories. However, with the recent exit of Justice Antonin Scalia from the United States Supreme Court, there are some indications that this tide has begun to turn. At the same time, it is clear that a Republican victory in November 2016 would return a conservative majority to the Court, and devastate any positive momentum in terms of workers’ rights.
Vaquero v. Ashley Furniture Industries, Inc., No. 13-56606 (June 8, 2016), a recent decision of the Ninth Circuit, is a good example of the type of decision that we can hope to see more of in the future. Vaquero does three important things. First, it properly limits the scope of Wal-Mart v. Dukes, 564 U.S. 338 (2011) with respect to the issue of commonality. Second, it limits the impact of Comcast v. Behrend, 133 S. Ct. 1426 (2013) in wage and hour class actions. Finally, it underscores the critical holding in Tyson Foods v. Bouaphakeo, 136 S. Ct. 1036 (2016) that plaintiffs may continue to rely upon representative evidence to prove both liability and damages. As such, Vaquero provides powerful ammunition for workers and their advocates in class actions. (more…)
Arbitration Agreements that Prohibit Class and Collective Actions Violate the National Labor Relations Act
A major storm-the biggest in decades- has been brewing for years in the American workplace. At its center is whether employers can require workers to waive their right to bring class, collection, and representative actions. The implications are enormous: As union membership has declined, workers have relied more on litigation to stop companies from breaking the law. If employers succeed in stripping workers of the right to do so, the results will be grim indeed.
Until recently, the field of combat had consisted of, on the workers’ side, the National Labor Relations Board, which held in D.R. Horton that such agreements violate Section 7 of the National Labor Relations Act (NLRA). On the employers’ side is a series Circuit Court decisions, D.R. Horton v. NLRB (5th Cir. 2013); Owen v. Bristol Care, Inc. (8th Cir. 2013); Sutherland v. Ernst & Young LLP (2d Cir. 2013); and Richards v. Ernst & Young, LLP (9th Cir. 2013). Each of those cases, to some degree, rejected the NLRB’s decision in D.R. Horton.
That field shifted dramatically on May 26, 2016. In Lewis v. Epic Systems Corporation, the Court of Appeals for the Seventh Circuit held that an arbitration agreement that prohibited class and collective actions violates Section 7 of the NLRA and was therefore not enforceable. [In a post dated February 2, 2016, I discussed a similar ruling by the Hon. Dolly M. Gee, a courageous federal judge.] As the first Circuit Court to reach this holding, Lewis changed the legal landscape significantly in a manner that benefits workers. (more…)
Hunter Pyle to speak about Workers’ Rights at Swiss Conference
I will be speaking at two conferences in Lausanne, Switzerland on May 27 and 27, 2016, along with a colleague, Todd Jackson, of Feinberg, Jackson, Worthman & Wasow. We have been invited by a Swiss attorney and law professor, Bettina Kahil. Professor Kahil audited our employment law course at Berkeley Law School in 2015. (more…)
Article III Standing and the U.S. Supreme Court
One of the big picture struggles playing out in federal courts is how much injury a plaintiff must suffer in order to have standing to sue under Article III of the U.S. Constitution. This issue is important because many laws provide rights to employees that are procedural in nature. For example, California Labor Code section 226 requires companies to provide certain information on an employee’s pay stub. Similarly, California’s Investigative Consumer Reporting Agencies Act (ICRAA) requires that companies give notice before running a background check on an employee. A heightened standing requirement could impact the ability of employees to pursue such claims in federal court. (more…)