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Law360 recently published an article that I wrote regarding the relationship between “unlimited” vacation policies and protected leaves of absence.  Most of the article is behind a pay wall, but Law360 subscribers can access the final version here.  An earlier draft of the published article appears below.

Leaves Of Absence And Non-Accrual Vacation Policies In California – An Uncertain Relationship

Employers in Silicon Valley and elsewhere are increasingly likely to adopt non-accrual vacation policies.  Under such a regime, employees receive their full pay while on vacation but do not formally “accrue” any paid time off or receive a payment for unused vacation on their last day of work.  The conceit of all non-accrual policies is that, subject to business needs, affected employees can take as much or as little vacation time as they want because their vacation usage will not be tracked.  Employers variously label these policies as “unlimited,” “untracked,” “open” or “discretionary” time off (DTO).

There is very little case law relating to non-accrual policies.  But many commenters—both in this publication and others—have advised that adopting a non-accrual policy subjects an employer to certain risks.  A recurring caution is that non-accrual policies have an uneasy relationship with protected Leaves of Absence (LOA).  This particular difficulty arises because protected LOAs are often treated as unpaid leave and excluded from an employer’s general policy of unlimited paid vacation.

This is a very risky approach.  A non-accrual vacation policy that pays employees anything less than their full salary during a protected LOA is arguably a violation of the Family and Medical Leave Act (FMLA), the California Family Rights Act (CFRA) and the California Pregnancy Disability Leave Law (PDLL).  Employees subject to a non-accrual vacation policy have a compelling argument that these statutes allow them to recover the salary their employer did not pay to them during their LOA as well as other damages.

The LOA Statutes Require That Workers Be Allowed To Use Paid Vacation Time During Their Absence

CFRA, PDLL and the FMLA each clearly state that a worker must be able to use paid leave during the term of their LOA.  For example, CFRA provides that the worker may use any “accrued vacation leave or other accrued time off … or any other paid or unpaid time off negotiated with the employer.”[i]  Similar statements appear in the text of the FMLA and the PDLL.[ii]  So how can an employer with an “unlimited” vacation policy possibly justify a refusal to pay workers who take an LOA?  Like a Facebook relationship status, “it’s complicated.”  The position depends on linguistic distinctions that may not be accorded much respect by a court.

The LOA Statutes Do Not Provide Any Explicit Exception For Non-Accrual Policies

In order to justify their position that unpaid LOAs and unlimited vacation are compatible, employers must persuade courts that their label of “no accrual” should be given controlling effect.  But courts may not agree because the non-accrual label depends on a counterintuitive notion.  Workers with a right to take a theoretically unlimited amount of paid vacation nevertheless do not “accrue” any time off.  In addition, finding that no vacation time is “accrued” is inconsistent with the dictionary definitions of the word which include “receive,” “arise” and “come into existence.”  Each of those seems to be an apt description of the paid vacation workers receive under a non-accrual policy.

If vacation days are “accrued” under a vacation policy and the employer fails to pay the full salary of employees on LOAs, then the policy violates the plain text of each of the PDLL, CFRA and the FMLA.[iii]  But, even if courts agree to apply the label attached to a given non-accrual policy and conclude that vacation days are not “accrued” under it, the inquiry is not over.  CFRA’s vacation time substitution requirement is not limited to “accrued” time off.  Rather, the employee must be able to substitute “any other paid or unpaid time negotiated with the employer” during the term of the leave.  Moreover, the CFRA regulations state that workers must also be allowed to substitute any “vacation time” (not just “accrued” vacation time) and the CFRA and PDLL regulations each broaden the substitution requirement to encompass “undifferentiated paid time off” as well.[iv]  Arguing that a non-accrual policy provides for neither vacation time nor undifferentiated PTO seems to be an exceptionally difficult road to hoe.

Denying Paid Vacation To Employees On LOAs Could Also Constitute Discriminatory Administration Of An Otherwise Valid Vacation Policy

Under the FMLA regulations, “employers may not discriminate against employees on FMLA leave in the administration of their paid leave policies.”[v] Administering a vacation policy in a way that pays employees on a three-week honeymoon but shortchanges those who are tending to sick relatives might well constitute discriminatory administration.  So would a policy by which absences that last beyond a certain duration are automatically converted to unpaid leave.

CFRA and the PDLL contain similarly broad catchall prohibitions on “restraining” or “limiting” rights that the statutes protect.[vi]  A policy that subtly discourages workers from asking for paid vacation during a protected LOA could “restrain” or “limit” their exercise of rights provided by CFRA and PDLL.  More generally, Labor Code § 227.3 requires application of “principles of equity and fairness” when resolving disputes regarding vested vacation time, pursuant to which a “subterfuge” vacation policy may be disregarded.  Equity and fairness might require treating workers as “vesting” in a day of vacation during each day of a protected leave of absence, after all they would have been paid for that time off if they had not sought protected leave under CFRA, FMLA or PDLL.

Workers Have A Variety Of Remedies At Their Disposal, Including Class Actions

An employee who worked for a company that provided “unlimited” vacation but refused to pay his or her full salary during an LOA would have a number of remedies under the relevant statutes.  The FMLA allows for recovery of “any wages, salary, employee benefits, or other compensation denied or lost.”[vii]  Here, that would mean back pay for the period of unpaid protected leave.  The FMLA also provides for liquidated damages (i.e. double damages) unless the employer proves its violation was in good faith.[viii]  CFRA and PDLL allow for similar economic recoveries and, although they do not provide for liquidated damages, punitive damages are available, unlike claims under the FMLA.[ix]

With regard to the timing of a claim, the statute of limitations for a claim under the FMLA is two years, but the period is extended to three years in the event of a willful violation.[x]  There is no requirement of administrative exhaustion.  The statute of limitations under CFRA and PDLL is generally one-year and follows a two-step process whereby the employee must first file an administrative complaint and then bring a civil action.[xi]  Conceivably, however, a violation of CFRA or PDLL could be actionable under California’s Unfair Competition Law when employees are seeking restoration of unpaid wages.  In that case, the statute would be extended to four years.[xii]

Finally, all the relevant statutes authorize class actions.[xiii]  This is important because at any large company with a non-accrual policy there are likely to be many similarly-situated takers of LOAs, all of whom were affected by the employer’s common, written policy that excludes employees on LOAs from using paid vacation.

Given the foregoing remedies and the uncertain state of the case law, employers would be wise to reconsider excluding LOA participants from benefiting from their unlimited vacation policies because although courts do give weight to the terms of a written policy (Boothby v Atlas Mechanical, Inc., 6 Cal.App.4th 1595, 1603 (1992)), there are clearly many reasons to think a non-accrual label will not be respected in the LOA context.

[i] Gov. Code § 12945.2(e).

[ii] The PDLL states an “employee shall be entitled to utilize any accrued vacation leave during [the leave].”  Gov. Code § 12945(a)(1).  The FMLA allows an eligible employee to substitute any “accrued paid vacation leave, personal leave, family leave, or medical or sick leave.”  29 U.S.C. § 2612(d)(3).

[iii] See Gov. Code § 12945(a)(1) (PDLL requires workers have option to use “any accrued vacation leave” during LOA); Gov. Code § 12945.2(e) (CFRA requires workers be allowed to use any “accrued vacation leave or other accrued time off” during LOA); 29 U.S.C. § 2612(d)(2) (FMLA requires that worker be allowed to “substitute any accrued paid vacation leave, personal leave, or family leave” during LOA).

[iv] Cal. Code Regs., tit. 2 §§ 7291.11(b)(2), 7297.5(b)(1).  Note that the revised regulations which take effect on July 1, 2015 contain substantially similar language.

[v] 29 CFR § 825.207(a).   The text of the FMLA also provides an employer shall not “interfere with, restrain, or deny” exercising any rights.  See 29 U.S.C. § 2615(a)(1).

[vi] Under Gov. Code §§ 12945(a)(4), 12945.2(t) it is unlawful “for an employer to interfere with, restrain, or deny the exercise of, or the attempt to exercise, any right provided under [those sections].”

[vii] 29 U.S.C. § 2617(a).

[viii] Id.

[ix] Gov. Code § 12965(c).

[x] 29 U.S.C. § 2617(c).

[xi] Gov. Code §§ 12960(d), 12965(b).

[xii] Cortez v. Purolator Air Filtration Products, 96 Cal.Rptr.2d 518 (2000).

[xiii] 29 U.S.C. § 2617(a)(2)(B), Gov. Code § 12961.

Disclaimer: All materials have been prepared for general information purposes only to permit you to learn more about Sebastian Miller Law, P.C, its services and experience.  The information presented is not legal advice, is not to be acted on as such, may not be current and is subject to change without notice.