Court of Appeal Gives California Employers a Break – but Not a Full Vacation – from PTO Reporting Requirements

Your employees may spend their time daydreaming about how to spend the vacation hours they accumulate each pay period – and in California, they are entitled to be paid out upon termination for any accrued, unused vacation time or paid time off.  But that doesn’t mean they are entitled to see a breakdown of the monetary value of accrued vacation or paid time off (PTO) on each wage statement, according to a recent ruling from a California state appellate court.  That said, employers still have an obligation to list an employee’s accrued sick leave on pay stubs consistent with California’s sick leave law.

In published decision on October 26, 2016, California’s Fourth Appellate District upheld a lower court’s ruling in favor of Motel 6.  This decision, which has broad implications for employers, appears to be the first published appellate court opinion on this issue.

In May 2015, former employee Lidia Soto argued Motel 6 violated California Labor Code section 226 by failing to provide employees with wage statements that included accrued vacation and PTO.  She alleged that accrued vacation/PTO qualified as “gross wages earned” or “net wages earned” under section 226 and therefore must be included on employees’ wage statements. 

The Court disagreed. In reaching its conclusion, the court noted California Supreme Court precedent (Suastez v. Plastic Dress-Up Co., 31 Cal.3d 774 (1982)) confirms that “paid vacation is a form of deferred wages, similar to a pension or retirement benefit,” such that “unused vacation time does not become a quantifiable vacation wage until the employee separates from the employment.” Accordingly, vacation pay does not qualify as “gross wages earned” or “net wages earned” under section 226 until termination, and thus, “there is no statutory duty to identify the monetary amount of the accrued vacation balance” in each wage statement prior to termination.

So far, this all sounds like a clear win for employers, but before booking the proverbial trip to Disneyworld, we have to remember California’s Paid Sick Leave law reporting requirements, which have been in place since July 1, 2015. 

As California employer’s know, California’s Paid Sick Leave law the “Healthy Workplaces, Healthy Families Act of 2014,” Cal. Lab. Code § 245 et seq.) contains the following reporting requirements in section 246(h):

An employer shall provide an employee with written notice that sets forth the amount of paid sick leave available, or paid time off leave an employer provides in lieu of sick leave, for use on either the employee’s itemized wage statement described in Section 226 or in a separate writing provided on the designated pay date with the employee’s payment of wages.

So, although the court in Motel 6 held that employers are not required to list out accrued vacation/PTO on each pay stub prior to termination, it did not address employers’ obligations under Section 245, which means that employers are still required to list out accrued paid sick leave/PTO on each pay stub per the paid sick leave law.

It is possible that the legislature could act in this area, either in response to Motel 6 or the interplay between the state’s sick leave law and wage statement requirements.  That said, California employers will want to have this on their radar as an issue to watch for future compliance.