Cash out vacation time in California – Here’s how to do it

Posted on January 3, 2022

In California, employees can cash out vacation time when discharged, or while still working. Once vacation time is accrued, it is owed as wages. Because vacation time is a form of wage, the worker is entitled to it upon discharge. While employers can cap how much vacation time a worker can accumulate, “use it or lose it” policies are forbidden.

How can workers cash out their vacation pay in California?

Employees who have vacation time can cash it out while on the job or when they leave their job. This is sometimes called a “PTO cash out“.Because vacation time is a form of wage under California state law, workers are entitled to receive unused vacation days if they quit. The payout has to come in the worker’s final paycheck. Many employers pay out for unused vacation time, or let workers cash it in at certain times of the year.

There are 2 times when a California employee can cash out his or her vacation time:

• at the time of their discharge, resignation, or termination, or
• while still working for the employer.

California employees are entitled to a payout for any unused paid time off (PTO), including vacation time, when they leave their job.¹ The payment amount has to be at his or her final rate of pay.² They are entitled to this payout because California treats vacation time as a form of wage.³ Employers are legally required to pay a departing worker any wages that they are owed. Employees are entitled to this payout, regardless of whether they:

• quit,
• resigned,
• got fired, or
• were laid off.

The payout has to be made in the employee’s final paycheck. This paycheck covers their last pay period, up to the time of termination. The payment has to be made immediately, if the worker was terminated or resigned with at least 72 hours of notice. If the worker quit without adequate notice, payment generally has to be made within 72 hours.⁴

If these final wages are not paid promptly, the employer can be liable for a waiting time penalty. This penalty is equal to the employee’s daily pay for each day that the final wages are late, up to 30 days.⁵

If the worker is subject to a collective bargaining agreement, the agreement controls how unused PTO is paid out.

Employers and employees can also arrange to pay out or cash out accrued vacation time while the worker is still on the job. These arrangements are often outlined in the employment contract. In some workplaces, it is only an option at the end of a calendar year. In other workplaces, it can happen at any time.

Regardless, workers are entitled to payment for their accrued vacation time. They are a form of wage that the worker has earned. Employers are forbidden from taking vacation time back. They also cannot take away vacation time as a punishment for other workplace misconduct. Vacation time in California also does not “expire.” This means that “use it or lose it” vacation policies are forbidden in the state.⁶

If an employer does any of these things, aggrieved workers can file a lawsuit under California’s wage and hour laws to recover their unpaid wages.

What if I quit or was fired?

California employees who quit or who were fired are entitled to a payout that covers any accrued PTO. This includes vacation time. The compensation for the accrued PTO has to be made in the worker’s final wages, and at the worker’s final rate of pay.

The only difference between workers who were fired and those who quit is when the final paycheck has to be provided:

• workers who were fired or otherwise terminated by their employer are entitled to an immediate payment after the termination of employment,
• workers who quit or resigned and who provided at least 72 hours of notice are entitled to an immediate payment, and
• workers who quit or resigned without adequate notice are entitled to their last paycheck within 72 hours after the employee leaves.⁷

If the employer fails to provide the last paycheck within these timeframes, they can be liable for a waiting time penalty.

When do vacation days accrue?

California labor laws state that vacation days accrue on a pro rata basis throughout the year.⁸ This means that, if an employer provides 12 vacation days per year, they do not all accrue at the end of the year. Instead, the employee is entitled to 1 every month.

This is often important for calculating how much compensation an employee is entitled to receive for his or her accrued vacation time after being discharged.

Are vacation days required in California?

No, employers are not required to provide vacation time under California employment law. While vacation benefits are not mandated by law, many employers in California offer them, though. They do this to attract better workers and keep their staff happy and healthy. Many also offer other forms of PTO, like personal days.

The only types of paid time off that are legally required in California are:

• meal breaks,
• rest breaks, and
• sick leave or sick time.

Can my employer cap the amount of PTO I accumulate?

Yes, employers are legally permitted to cap the amount of paid time off that a worker accumulates. This includes the amount of vacation accrual. The only time an employer cannot put accrual caps on PTO is if it would be discriminatory.

Some common limitations that California employers use in a PTO policy are:

• a maximum number of vacation days that a worker can accrue,⁹
• a minimum advance notice period before using vacation days,
• different PTO plans for managers, full-time workers, and part-time workers, including eligibility limitations,
• restrictions on when PTO can be used, like a “blackout” for especially busy times of the year when all workers need to be on hand, and
• limitations on how many vacation days a worker can use in a row.

These limitations can be significant. While California law does not let employers take an employee’s vacation time back, like in a “use it or lose it” policy, employers can stop the accrual of vacation pay by capping the amount of leave that a worker can earn. The employer’s policy for its California vacation accrual rate is usually set out in the employee handbook.

However, some limitations have been found to be unfair and will not be enforced by the California Division of Labor Standards Enforcement (DLSE). One of these unfair policies is to mandate that all vacation time be used in the year it was earned.¹⁰ Another unfair policy was to require workers to use any vacation time they could carry over from the prior year of employment before accruing any new vacation time.¹¹

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