Vacation Policy Best Practices

In this episode of The Workplace podcast, CalChamber Executive Vice President and General Counsel Erika Frank is joined by employment law experts Bianca Saad and Matthew Roberts to discuss some of the best practices and common pitfalls of vacation policies in California.

Accrual Caps

Vacation policies are offered by employers at their option as there is no legal requirement to provide vacation time, Saad explains. Nevertheless, if an employer chooses to offer vacation time to its employees, the company must follow certain rules.

For example, she says, employers cannot establish a “use it or lose it policy,” whereby employees must use their vacation time by a certain date or lose their accrued vacation time. Accrued vacation time is treated as earned wages, and thus if an employee were to separate from the company, the accrued time must be paid out to the employee.

Employers can, however, set a reasonable cap on vacation accruals, Roberts adds. There are limits, and the accrued time cannot be taken away.

Frank explains that a cap on accrual is when an employee stops accruing vacation time if they have hit the cap the employer has previously set. Once an employee uses their vacation time and their time in their “bank” falls below the cap, then the employee will resume accruing vacation time.

In the past, a Labor Commissioner letter stated that a reasonable cap of 1.5 times the annual accrual rate for the employee was acceptable, but that letter is no longer in existence, Roberts tells Frank. Still, the idea behind a “reasonable cap” is for employers to allow enough opportunity for an employee to use the vacation accrued within a year of accruing it.

“So, if we stay within the 1.5 to 2 times their annual accrual rate, more than likely you’ll fall back within that ‘reasonable cap’ percentage,” Roberts says.


Frank asks if employers could provide an advance on vacation time, say, in the case of a new hire who may already have planned to take a trip to Hawaii a month out from being hired. Could the employer provide an advance on the new hire’s vacation time?

Saad replies that while an employer can do so at their option, problems may arise.

For example, Saad says, if that new hire separates from the company before accruing the vacation time that was owed, the employer cannot deduct that owed time from the employee’s final pay.

Nor can the employer tell the employee that they must pay the company back for that vacation debt, Frank adds.

Crafting a Vacation Policy

An important best practice, Roberts says, is establishing a vacation policy and including it in the employee handbook or manual. Having a policy in place will help resolve any disputes that arise with the Labor Commissioner.

A vacation policy should establish the parameters of using accrued time, defining accrual rates, and specifying when using vacation time is required, such as in the case of leaves of absence, he explains. This is important because if using vacation time is required in the event of an unpaid leave of absence, for example, the Labor Commissioner has established that the employer must provide reasonable notice to employees.

Employers should avoid policies where vacation time is added to an employee’s accrual in one lump sum, Roberts points out, because it may appear as though the employer is trying to avoid the “accruing as you work” principle.

Doing so may appear as though the employer is requiring that certain benchmarks are made before a new hire’s accruals are released, and the employer is simply avoiding paying vacation accruals in the first year of hire, he explains.

Employers can, however, establish a provision in the policy where an employee does not accrue vacation time until after a particular amount of time. For example, it’s fine to say that an employee cannot accrue vacation time in their first year of employment, but may accrue vacation time after that first year, Roberts says.