California Rules on Vacation and Paid Time Off

Employers must follow certain rules when providing vacation or paid time off in California.

In California, employers are not required to provide any paid vacation or paid time off (PTO) to their employees. However, studies have shown that giving employees time off to relax benefits not only employees, but also employers. Happier, healthier employees usually mean greater productivity and employee retention for employers. Because of this, many employers choose to offer vacation as a benefit of employment.

Employers who choose to offer vacation must follow certain guidelines. California law considers accrued vacation to be a form of wages that have already been earned by the employee. Among other things, this means that accrued vacation cannot expire and must be paid out to an employee upon termination or separation from the employer. The same rules apply to PTO.

Sick leave is not subject to the same rules as vacation and PTO. As of July of 2015, California employers are required to provide a minimum number of paid sick days per year. (To learn the rules on eligibility and accrual, see our article on California paid sick leave)

Vacation Accrual

In general, vacation accrues over time as an employee works. For example, if a vacation policy gives an employee ten days of vacation each year, he or she will accrue five days of vacation after working for six months.

Employers can designate a waiting period at the beginning of employment before vacation starts to accrue, though. The waiting period often correlates with the 90-day introductory period, but can be as long as the first year of employment.

Employers can also give vacation to certain groups of employees but not others, as long as they don’t discriminate based on a protected characteristic, such as race or gender. For example, employers may give vacation only to full-time employees or only to managers.

Reasonable Cap on Vacation Accrual

Unlike some other states, California does not allow “use-it-or-lose-it” vacation policies. Under a “use-it-or-lose-it” policy, accrued vacation must be used by a certain date – usually by the end of the year – or it is forfeited. Because accrued vacation is considered earned wages, use-it-or-lose-it policies are seen as illegally withholding wages owed to employees.

Employers can, however, place a cap on vacation accrual. In other words, once employees reaches a certain number of days, they will stop accruing vacation until they use some of their vacation. This allows employers to maintain some control over vacation accrual and prevent employees from racking up unreasonable amounts of vacation time.

While there’s no set number for a permissible cap, the California Department of Labor Standards Enforcement (DLSE) – the agency that enforces California wage and hour laws – has provided some guidance. In the past, the DLSE has held that a vacation cap could be no less than 1.75 times the annual accrual rate. However, the DLSE has since withdrawn that bright line rule and instead states only that the cap must be “reasonable.” While a 1.75 cap is probably still the safest ratio, a 1.5 cap may also be within legal limits. The example below shows how the vacation cap works.

Example: Sunshine Inc. provides all full-time employees with ten days of paid vacation each year. Sunshine’s vacation policy has a cap of 1.75 times the annual accrual rate, or 17.5 days (1.75

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