In recent years, some employers have implemented so-called “unlimited” vacation policies, mostly applied to exempt employees, that leave it up to employees and their supervisors to decide how much paid time off to take.  On April 1, 2020, the California Court of Appeal addressed for the first time whether California law requires an employer with an “unlimited” vacation policy to pay an employee for “unused” vacation upon the employee’s separation from employment.  The court held that on the specific facts of the case before it, the employer was required to pay its former employees for unused vacation, but also offered guidance as to what kind of unlimited vacation policy might relieve an employer of the obligation to pay out accrued but unused vacation upon an employee’s separation.

Background on California Law Governing Vacation Policies

California law does not require employers to provide employees with paid vacation.  But when an employer does provide paid vacation, Labor Code section 227.3 requires employers to pay as wages any “vested” vacation time that separating  employees have not used.  Decades ago, in Suastez v. Plastic Dress-Up Co., 31 Cal.3d 774, 784 (1982), the California Supreme court addressed when the right to vacation “vests” under section 227.3, stating:

The right to a paid vacation, when offered in an employer’s policy or contract of employment, constitutes deferred wages for services rendered.  Case law from this state and others, as well as principles of equity and justice, compel the conclusion that 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  On termination of employment, therefore, the statute requires that an employee be paid in wages for a pro rata share of his vacation pay.

While Section 227.3 effectively prohibits so-called “use-it-or-lose-it” vacation policies, an employer may adopt a policy that creates a waiting period at the beginning of employment during which no vacation time is earned, and therefore none vests.  An employer may also adopt a policy that “caps” the amount of vacation an employee accrues, by precluding accrual of additional vacation time once an employee has reached a specified maximum.  Under such a policy, the employee does not forfeit vested vacation pay because no more vacation is earned once the maximum is reached, and therefore no more vests until such time as the employee uses accrued vacation, drops below the cap, and once again begins to accrue more vacation.

In order to pay a separating employee all “vested” vacation, an employer necessarily must keep track of how much vacation an employee earned and used during employment.  But what happens if an employer offers “unlimited” vacation to an employee, or allows an employee to take paid time off, but never notifies the employee of precisely how much paid time off the employee may take?  That is the question addressed by the California Court of Appeal in its recent opinion.

McPherson v. EF Intercultural Foundation, Inc.

EF Cultural Foundation, Inc. (EF) runs educational and cultural exchange programs between the United States and other countries.  While EF’s employee handbook included a policy providing most salaried employees with a fixed amount of paid vacation days per month based on their lengths of service, that policy did not apply to “area managers,” a handful of exempt employees tasked by EF to run the company’s programs within their regions.  While area managers could, with their supervisors’ permission, take paid time off, they did not accrue vacation days or track the number of vacation days they took, nor were they ever notified of any specific limit on the amount of paid days off they could take.

After their employment ended, three area managers sued EF, alleging the company failed to pay them accrued but unused vacation upon their separation from employment.  After a bench trial, the trial court found EF liable for failing to pay the plaintiffs unused vacation, finding the plaintiffs’ right to take vacation time was not truly “unlimited” but rather was “undefined.”  The trial court found that “vacation time vests under a policy where vacation time is provided, even if the precise amount is not expressly defined by the employer in statements to employees.”  The trial court explained that “offering vacation time in an undefined amount simply presents a problem of proof as to what the employer’s policy was.  That policy is implied through conduct and the circumstances, rather than through an articulated statement.”  The trial court concluded that based on the evidence presented at trial, the area managers were provided at least 20 days of vacation per year, therefore that amount vested annually for each plaintiff, and Section 227.3 required EF to pay them the unused portion when their employment ended.

The California Court of Appeal agreed with the trial court’s conclusion that Section 227.3 applied to the area managers “[o]n the particular, unusual facts of this case.”  The appellate court emphasized that the company did not provide the area managers “unlimited” vacation in practice, nor did the company publish a formal policy notifying the area managers they had “unlimited’ vacation, and therefore the trial court was correct in determining their right to vacation was undefined, not unlimited.  But the court was careful to note that although Section 227.3 applied to EF’s informal, unwritten vacation policy, that does not mean Section 227.3 “necessarily applies to truly unlimited time off policies.”  The court suggested that such a policy “may not trigger section 227.3” if the policy is in writing and it:

1. Clearly provides that employees’ ability to take paid time off is not a form of additional wages for services performed, but perhaps part of the employer’s promise to provide a flexible work schedule—including employees’ ability to decide when and how much time to take off;
2. Spells out the rights and obligations of both employee and employer and the consequences of failing to schedule time off;
3. In practice allows sufficient opportunity for employees to take time off, or work fewer hours in lieu of taking time off; and
4. Is 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 offered these criteria as only an “example” of an unlimited time off policy that might not require a payout of unused vacation upon the end of employment, and not as a bright-line rule.

The appellate court’s opinion makes it clear that not all unlimited vacation policies necessarily dispose of the requirement to pay some amount of “vested” vacation upon an employee’s separation.  Employers operating in California that wish to establish or continue unlimited vacation policies should review those policies, and modify them if necessary, to ensure they are consistent with the California court’s  guidance.

Aaron Buckley
Paul, Plevin, Sullivan & Connaughton LLP – San Diego, CA

Last Thursday, in a unanimous opinion, the California Supreme Court held that the time employees spend on an employer’s premises waiting for and undergoing required exit searches of their bags and other personal items that they bring to work purely for their own personal convenience, constitutes “hours worked” for which the employees must be paid.

Apple Inc. requires its retail store employees to undergo mandatory searches of their bags, packages, purses, backpacks, briefcases, and personal Apple technology devices (e.g., iPhones), before leaving the store for any reason, including after completing their work shift and clocking out.  In 2013, several employees sued Apple in a California federal district court to recover wages for the time spent undergoing these security checks.  They brought their claims under both California law and the federal Fair Labor Standards Act (FLSA).  The employees estimated that the time spent waiting for and undergoing the exit searches typically ranged from five to 20 minutes, but could take up to 45 minutes on the busiest days.

The district court dismissed the FLSA claims after the United States Supreme Court’s 2014 decision in Integrity Staffing Solutions v. Busk, which held that time spent undergoing mandatory security screenings is not compensable “hours worked” under the FLSA.  The district court later dismissed the plaintiffs’ California law claims, holding that exit search time was not “hours worked” because the employees could avoid the searches by not bringing bags or other personal items to work.  The employees appealed.

The Ninth Circuit Court of Appeals then asked the California Supreme Court to weigh in on the issue.  In last Thursday’s opinion, California’s high court hinged its decision on the significant differences between the FLSA and California law in defining “hours worked.”  In 1947, the FLSA was amended to narrow the definition of “hours worked,” excluding activities that occur before or after employees perform the “principle activity” they are engaged to perform.  As a result, under the FLSA, some pre-shift and post-shift activities are not compensable, even when required by an employer.  In contrast, California’s wage orders generally define “hours worked” much more broadly, to include all the time an employee is “subject to the control” of an employer, and all the time an employee is “suffered or permitted to work, whether or not required to do so.”

Applying this definition, the California Supreme Court concluded the employees were “subject to [Apple’s] control” when they waited for and underwent security checks, because these checks were required for Apple’s benefit.  The court rejected the district court’s conclusion that the security checks were essentially voluntary because employees could avoid them by not bringing personal items to work, reasoning that the realities of 21st-century life mean employees have little choice but to bring mobile devices and other personal items to work.

This decision illustrates two realities for all California employers.  First, California employees must be compensated for time engaged in pre-shift and post-shift activities that might not be compensable elsewhere.

Second, California employers should ensure employees are compensated for required activities that involve even very small amounts of time.  In 2018, the California Supreme Court held that the federal de minimis rule, under which small amounts of time need not be compensated under certain circumstances, does not apply to wage claims brought under California law.  As a result, claims for unpaid wages brought under California law are more difficult to defend.  Employers should therefore be vigilant about capturing and compensating employees for all time spent under the employer’s control, including security checks and other activities that might begin and end very quickly.

Aaron Buckley – Paul, Plevin, Sullivan & Connaughton LLP – San Diego, CA

Sunday, October 13, 2019, was the last day for Governor Gavin Newsom to approve or veto bills passed by the state Legislature. This year’s approved employment-related bills generated quite a buzz, and for good reason. This e-Update surveys some of the most significant changes that will impact California employers. Paul, Plevin will review these and other new laws at the firm’s annual Employment Law Update on Friday, November 1st at the Hilton San Diego Resort & Spa on Mission Bay.

All new laws take effect January 1, 2020, except as indicated below.

Assembly Bill 5 – Employee versus Independent Contractor Status

Assembly Bill 5 codifies the “ABC” test adopted in Dynamex Operations v. Superior Court to determine whether a worker is an employee or independent contractor. The Dynamex decision was limited to only certain parts of the Labor Code, but Assembly Bill 5 extends the “ABC” test to virtually all California workers, excluding certain specifically enumerated industries and occupations (e.g. doctors, investment advisors, and hairdressers). In addition to various complete exceptions, this bill allows contracts of certain employers and industries to be governed by the more forgiving Borello multi-factor “economic realities” test, provided they meet a set of listed requirements.

Assembly Bill 9 – More Time To Bring Discrimination and Harassment Claims

The Stop Harassment and Reporting Extension Act extends the period for an aggrieved employee to file a complaint alleging harassment, discrimination, or other unlawful practices with the Department of Fair Employment and Housing (DFEH) from one year to three years. The new limitations period does not apply to claims that have already lapsed if a complaint was not filed with the DFEH.

Assembly Bill 51 – Prohibition on Mandatory Arbitration Agreements

This new law makes it a criminal misdemeanor for an employer to require an applicant or employee to enter into an agreement to arbitrate any claims under the Fair Employment and Housing Act or the California Labor Code. Arbitration agreements in place before January 1, 2020 will still be enforceable, as long as they are not extended or modified after that date. While the drafters of the bill attempted to avoid preemption by the Federal Arbitration Act, that question will likely be tested in the federal courts.

Assembly Bill 673 – Recovery of Civil Penalties

Employees will be able to obtain penalties as part of a Labor Commissioner hearing to recover unpaid wages. Under the current law, penalties must be paid to the State, but this new law allows workers to personally collect the penalty instead. An employee, however, still cannot “double dip”; he or she has to choose between recovering statutory penalties under these provisions or enforcing civil penalties under the Private Attorney General Act.

Assembly Bill 749 – “No Rehire” Provisions Prohibited in Settlement Agreements

This new law prohibits an agreement to settle an employment dispute from containing a provision that prohibits, prevents, or otherwise restricts the claimant from working for the employer against which the claimant filed a claim, or any affiliated entity. An employer and employee are permitted, however, to agree to end a current employment relationship or restrict the employee from obtaining future employment with the employer, if the employer made a good faith determination that the employee engaged in sexual harassment or sexual assault. Further, an employer is not required to continue to employ or rehire an employee if there is a legitimate, non-discriminatory or non-retaliatory reason for terminating or refusing to rehire the employee.

Assembly Bill 1554 – Flexible Spending Accounts

This new law requires employers to notify, in a prescribed manner, an employee who participates in a flexible spending account of any deadline to withdraw funds before the end of the plan year. “Flexible spending accounts” include but are not limited to: (1) dependent care flexible spending accounts; (2) health flexible spending accounts; and (3) adoption assistance flexible spending accounts. The required notice shall be provided by two different forms, one of which may be electronic.

Senate Bill 142 – Lactation Accommodations

This new law, largely based on the San Francisco ordinance for lactation accommodations passed in 2017, further expands protections for lactating workers by requiring employers to provide a lactation room, other than a bathroom, that shall be “in close proximity to the employee’s work area, shielded from view, and free from intrusion.” The lactation room must also (1) be safe, clean, and free from toxic or hazardous materials; (2) contain a surface to place a breast pump and personal items; (3) contain a place to sit; and (4) have electricity. Employers must also provide access to a sink with running water and a refrigerator in close proximity to the employee’s workspace. This law also requires employers to develop and implement a lactation accommodation policy, include it in employee handbooks, and provide it to new employees or when an employee raises parental leave. Employers with fewer than 50 employees may seek an exemption to these new requirements if they can demonstrate undue hardship.

Senate Bill 778 – Sexual Harassment Training Deadline Extension

This bill is emergency legislation, and therefore took effect immediately upon signing on August 30, 2019. This new law delays the deadline to complete supervisor and non-supervisor sexual harassment training under the FEHA from January 1, 2020 to January 1, 2021. However, new non-supervisory employees must still be provided at least one hour of sex harassment training within six months of hire, and new supervisory employees must be provided training within six months of the assumption of a supervisory position.

Senate Bill 83 – Expansion of Paid Family Leave

This new law extends the maximum duration of paid family leave (PFL) benefits from six weeks to eight weeks beginning July 1, 2020. Workers paying into the California State Disability Insurance (SDI) program may receive such PFL benefits to (1) care for a seriously ill child, spouse, parent, grandparent, grandchild, sibling, or domestic partner, or (2) to bond with a minor child within one year of the birth or placement of the child through foster care or adoption. Additionally, this new law allows state government employees that pay into the Nonindustrial Disability Insurance (NDI) program to receive six weeks of paid leave. Further, this law requires the governor to propose by November further benefit increases—in terms of duration and amount—and job protections for individuals receiving PFL benefits.

Senate Bill 188 – Hairstyle Discrimination

The Creating a Respectful and Open Workplace for Natural Hair (CROWN) Act, expands the definition of “race” under the FEHA and the Education Code to include both hair texture and protective hairstyles that are closely associated with race. The Act bans not only general employment discrimination, but also dress codes and grooming policies that prohibit “natural hair, including afros, braids, twists, and locks,” which would have a disparate impact on black applicants and black employees. FEHA exceptions for bona fide occupational qualifications and security regulations still may apply. California is the first state to codify this rule.

Fred Plevin
Paul, Plevin, Sullivan & Connaughton LLP