A California Court of Appeal Tests the Limit Of “Unlimited” Vacation Policies

“Unlimited” vacation policies have become incredibly popular throughout California, particularly in the tech industry, as a means of offering greater flexibility to employees.  Under typical unlimited vacation policies, employees can take as much vacation as they like, subject to their manager’s approval.  Because employees do not accrue vacation under these policies, there is presumably no obligation for an employer to pay employees for any unused vacation upon their departure from the company, as required by Labor Code section 227.3.

On April 1, 2020, in McPherson v. EF Intercultural Foundation, Inc., a California Court of Appeal cast doubt on a commonly held belief.  According to McPherson, whether employees accrue vacation under an unlimited vacation policy may depend on what the policy says and how the employer implements it.

It is noteworthy that the vacation policy at issue in McPherson was not a typical unlimited vacation policy: it was not even in writing.  The employer merely told the exempt, salaried plaintiffs that they could take paid time off outside the peak summer busy season (subject to their management’s approval) and that they did not accrue or need to track their vacation days.  Plaintiffs’ average vacation time was two weeks each year, and they took no more than four weeks in the relevant time period.

Under these circumstances, the court found that the employer did not really have an unlimited vacation policy because (1) the employer never told the plaintiffs that it had an “unlimited” vacation plan or that they did not accrue vacation, and (2) the policy had an implied “cap” on the amount of time plaintiffs could take because the rigors of plaintiffs’ job (i.e. busy season) prevented them from taking more time off.  Of significant consequence in the court’s reasoning was that plaintiffs were not free to decide how or when they took vacation, such as whether they could work fewer hours per day spaced out over a year or work more hours in a day with a prolonged period of time off, as would, according to the court, be the case with a truly unlimited policy.

Ultimately, the court declined to hold that vacation accrues under all unlimited vacation plans.  Rather, the court outlined – perhaps legislated – criteria for a vacation policy that would constitute a truly unlimited policy not subject to Labor Code Section 227.3, including that it must:

1. be in writing;
2. clearly provide that employees’ ability to take paid time off is not a form of additional wages for services performed, but the employer’s promise to provide a flexible work schedule — including employees’ ability to decide when and how much time to take off;
3. spell out the rights and obligations of both employee and employer and the consequences of failing to schedule time off;
4. in practice allow sufficient opportunity for employees to take time off, or work fewer hours in lieu of taking time off; and
5. be 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.

Unfortunately, the court provided no more guidance than this about the meaning of these criteria.

In calculating plaintiffs’ damages, the court used the highest number of vacation days per year it could justify (in this case, twenty), even though there was scant evidence that any of the plaintiffs had actually taken that much time off. The court supported this reasoning by juxtaposing a hypothetical worker who chooses to work longer hours for nine months and then take three or more months of vacation to ski or surf, and a parent who chooses to work fewer hours each day in lieu of taking any vacation. But the court’s approach to damages may mean that the highest possible number of vacation days – three or more months in the court’s hypothetical – would be used to calculate damages for all employees who bring claims, including the parent who did not take nearly as much vacation time.

Release of Claims

Adding insult to injury, the court invalidated a general release of claims in one of the plaintiff’s separation agreement and held that it did not release the plaintiff’s claim for unpaid vacation pay.  Labor Code section 206.5 bars releases of claims for wages owed unless there is a “bona fide dispute.”  The court stated that California courts may readily uphold releases of disputed wage claims, but only where “the releases [arise] from pending wage disputes or litigation where actual controversies existed between the parties.” (emphasis in original). In McPherson, there was no dispute over the vacation wages at the time the plaintiff signed the separation agreement and thus the release did not bar the later claim for vacation wages under Labor Code section 206.5.  This was the case notwithstanding the plaintiff’s agreement to release her unknown claims and waive rights under Civil Code section 1542.

Conclusion

Employers who implement unlimited vacation policies are well-advised to work with counsel to analyze and make modifications to the policy language and management of the policies.  Given the number of layoffs caused by the COVID-19 crisis, we expect that employers who use unlimited vacation policies may face actions by former employees seeking payment of allegedly accrued vacation.