California: Employer’s Unlimited Vacation Policy is Invalidated by Appeals Court

In McPherson v. EF Intercultural Foundation, Inc., the California Court of Appeal reviewed the enforceability of an “unlimited” vacation policy for purposes of paying out wages (including unused vacation) on termination. There, the employer had an informal, unwritten vacation policy in which area managers could take time off with pay, but they did not accrue vacation days. The court understood this to mean there was an implied cap on the amount of vacation that could be taken, consistent with the amount that was typically taken in practice (i.e., two to four weeks), rather than vacation actually being “unlimited” (e.g., employees could not reasonably expect to take six months of vacation in a year).

Because the employer did not tell area managers they had unlimited vacation, the employer did not have a formal, written “unlimited” vacation policy, and the policy was not unlimited in practice, the employer failed to define the limitations of taking vacation.  As a result, the employer was required to pay out vacation wages to former employees making the claim as if they had been subject to the vacation policy in the employee handbook that applied to other employees.

The court offered guidance on what an approved “unlimited” vacation policy should include:

• It should be in writing.
• It should specify that employees’ ability to take paid time off is not a form of additional wages for work performed; rather, it could be stated as being a 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.
• It should expressly describe the rights and obligations of both employees and the employer, as well as any consequences for failing to schedule time off.
• The policy should have the effect of allowing sufficient opportunity for employees to take time off, or work fewer hours in lieu of taking time off.
• The policy must be administered fairly so that it is not a “use it or lose it policy” in practice, and does not result in inequitable application among employees.

The court limited its analysis to the facts of this case, which means that other unlimited vacation policies may be interpreted differently. However, employers should review unlimited vacation policies with legal counsel in light of the recent opinion.

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