California has a unique vacation law. Vacation benefits are considered wages. Once earned, they must be paid. California prohibits use-it-or-lose-it vacation policies.
All wages must be paid at the time of termination of employment. Termination means separation of employment. It does not refer to whether a person quit or was fired. At separation, all wages, including accrued but unused vacation benefits.
1993 DLSE Opinion Letter
In 1993, an employer asked the DLSE whether shut-downs of short duration, most often nor more than one week, constitute the termination of employment. In response, the DLSE stated its policy that a shut-down not exceeding 10 days with a definite return date does not constitute termination of employment. However, a shut-down of more than 10 days is considered a termination and payment of wages is due immediately pursuant to Labor Code § 201.
Section 201 states that all wages are due “if an employer discharges an employee.” This section does not address the situation of when the government, by emergency order, shuts down a business. However, many lawyers examining whether vacation and other wages were immediately due when Governor Newsom issued his COVID-19 Emergency Order shuttering businesses often told clients to pay out accrued vacation benefits. That was the safest advice to give. I gave it to my clients.
Some employers did not seek legal advice regarding the payment of accrued vacation benefits at the start of the COVID-19 shutdown. When it became obvious, after several weeks, that the shutdown was not a short-term matter, most employers paid out all vacation wages. However, some of their employees, particularly those who did not return to work when the shutdown was partially lifted, have filed claims for unpaid wages with the Labor Commissioner.
This raises the question: Whether waiting time penalties can be imposed on an employer for failing to immediately pay employees who were subject to a lay off as a result of the governor’s order.
Waiting Time Penalties
Waiting time penalties are imposed when an employer willfully fails to pay any wage who is discharged or who quits. The penalty is calculated at the employee’s daily wage for up to 30 days.
According to the DLSE, a willful failure to pay wages occurs unless there is a good faith dispute, based in law or fact, which, if successful, would preclude recovery on the part of the employee. (DLSE Manual, § 4.2.)
I attended two conferences with the Labor Commissioner today which focused on the allegedly late payment of vacation wages by the employer. The company’s shutdown and subsequent layoff was the result of the governor’s order. The company, a medical firm, did not intend or choose to shut down. It did so as a result of governmental fiat. It intended to bring back every employee as soon as the shutdown was lifted, which the company anticipated would be a short time period.
The company paid out all vacation benefits within a few weeks; however, it was not immediately at the time of the government shutdown. Several weeks after, when the business was allowed to open, the patient count was so low that it could not return all workers to the job. The decision to terminate, or not return two workers to the job, was made at that point, but after all vacation wages were paid out.
These employees who did not return to the job filed complaints with the office of the Labor Commissioner. We held the settlement conferences today.
I made the argument that waiting time penalties should not be imposed because the company did not discharge employees until several weeks after all vacation wages were paid. The deputy handling the case informed me that the Labor Commissioner has not yet determined how to handle this issue when the shutdown was the result of the governor’s order, and the employer did not make a decision of termination until a much later date after all wages have been paid.
The Equitable Result
The only fair and equitable result is to not penalize employers for failing to immediately pay wages, including vacation benefits, at the time of the government-appointed shutdown. In large part, employers did not intend to terminate the employment relationships with employees. Rather, they waited patiently, hoping the government would lift the artificial shutdown. To rule otherwise is unconscionable and without legal basis. The only authority on the subject is the DLSE’s own opinion letter. It unilaterally decided, without the benefit of any court ruling, that 10 days was the magic number of days an employee could be absent without being discharged. Instead of an artificial rule, the Labor Commissioner should rule in favor of an employer unless there is evidence that it intended to terminate the employment relationship prior to payment of all wages.
An employee is not harmed by such a ruling. An employee could ask for the payment of vacation benefits if (s)he wanted them. Or the employee could tell the employer (s)he quit and wanted the vacation benefits paid out.
We have yet to see how the Hearing Officers in the Labor Commissioner’s offices will rule on the issue. Hearings have been postponed due to the COVID-19 pandemic. For employers who paid vacation benefits out at a later date should argue that penalties are inappropriate absent proof of the intent to terminate.
This article was written by Douglas M. Larsen. He can be reached at 559.256.5000 or [email protected].