“Use It or Lose It” Vacation Policy – Is it legal in California?

In California, “use it or lose it” vacation policies are prohibited.

However, employers are only prohibited from taking back vacation time that has already accrued. They can take other measures to limit how much vacation time you can accumulate, such as capping the number of vacation days you can build up.

In this article, I discuss what you need to know about getting paid for accrued vacation time.

Overview

In California, accrued vacation is treated as earned wages that vest as they are earned.¹ You are entitled to receive your wages once you have earned them. Therefore, once you have earned your vacation time, you are entitled to receive and keep it.

This makes “use it or lose it” vacation policies, or similar policies for other forms of PTO (paid time off), unlawful in California.

California is one of only a few states in the U.S. with protections against “use it or lose it” PTO policies. In other states that also forbid the practice, state law treats PTO and vacation time as a “wage.”² Most states in the country either expressly permit these PTO policies or lack laws governing them.

Note, though, that there is no legal requirement under California vacation law for your employer to provide either paid or unpaid vacation time. However, many choose to provide vacation benefits, as well as other PTO like paid sick leave and personal days, to attract better workers.

Vacation Limits

However, just because California employers cannot adopt a “use it or lose it” policy for vacation time or PTO does not mean they cannot limit it in other ways. Some common ways around California’s prohibition are:

• limiting when you can use your accrued time off, such as by implementing a “blackout” period when things are expected to get busy,
• maximizing the number of days of vacation that you can use in a row,
• lowering the annual accrual rate after a set amount of vacation time has accumulated, and
• capping how much vacation time you can accrue.³

This last policy, capping how much time you can build up, is similar to a “use it or lose it” policy. Rather than losing your vacation time, you just cannot get any more of it until you use some. However, the California Labor Commissioner’s Office requires that this be a reasonable cap on the accrual of vacation.⁴

So long as your employer does not implement these policies in a discriminatory way, they can be used in California to limit an employee’s vacation time.

Forbidden Practices

There are, however, specific ways of limiting your vacation time that the California Division of Labor Standards Enforcement (DLSE) forbids. According to the DLSE, the following limitations on the use of your vacation time are unfair and will not be enforced in the state:

• requiring you to use all of your vacation time in the calendar year in which it was accrued,⁵ and
• forcing you to use carry-over vacation time from last year before you could receive any new time in the current year.⁶

The employment lawyers at our law firm have found that plenty of California employers still use these policies. Some may even take away vacation accrual at the end of the year. They may be unaware that these policies are unenforceable under California labor law. On the other hand, they may know that they are unlawful but hope that their employees do not know the law.

Vacation Pay

Because state employment law treats vacation time as a form of wage, and because you are entitled to your wages once they have been earned, you have a right to cash out unused vacation time when your job ends. You are entitled to it even if you were:

• fired, or
• laid off.

According to California law, your employer is not allowed to take away vacation time:

“An employment contract or employer policy shall not provide for forfeiture of vested vacation time upon termination.”⁷

The payout for your unused vacation time would be included in your final paycheck. This paycheck would also cover the wages earned during your final pay period. The payment has to be made:

• immediately, if you were terminated or you resigned with at least 72 hours of notice, or
• within 72 hours, if you did not provide at least 72 hours of notice.⁸

If an employer fails to pay an employee’s final paycheck within this time period, they may face a waiting-time penalty. This penalty is your daily pay for each day the wages are late, up to the maximum waiting period of 30 days.⁹

The amount of the payout for your accrued vacation time is based on your final rate of pay, not on your rate when each day of vacation was accrued.¹⁰

You are also entitled to cash out your other PTO when you quit or are discharged.

Our employment attorneys have found that some employers let their workers cash out paid vacation time and other PTO while they are still on the job. Check your employment contract or employee handbook to see whether your employer has such a policy, or whether your PTO payout is only available at termination of employment.

Certain collective bargaining agreements may alter the default payout rules under Labor Code section 227.3.

California prohibits “use it or lose it” vacation policies.

Frequently Asked Questions

Can California employers offer unlimited PTO instead of vacation time?

Yes. California employers may offer unlimited paid time off (PTO) policies. If an unlimited PTO policy is genuine and does not provide a fixed amount of earned leave, there may be no accrued vacation balance to cash out when employment ends. However, employers must carefully draft and administer unlimited PTO policies to avoid creating an implied right to earned vacation.

What is the difference between PTO and vacation time in California?

Vacation time is paid time off that employees earn as a benefit of employment. PTO plans often combine vacation, personal days, and other forms of leave into a single bank of hours. If PTO is earned and accrued like vacation, California law generally treats it the same way as vacation for purposes of forfeiture and payout at termination.

Can my employer force me to take vacation days in California?

Generally, yes. Employers may reasonably control when vacation is taken and may require employees to use accrued vacation during company shutdowns, seasonal closures, or other designated periods. However, employers cannot force employees to forfeit vacation that has already been earned.

What is a reasonable vacation accrual cap in California?

California law allows employers to place a reasonable cap on vacation accrual. A cap temporarily stops employees from earning additional vacation once they reach a specified limit. While no single cap is automatically lawful in every situation, many employers use caps that allow employees to accrue at least one-and-a-half to two times their annual vacation entitlement.

Does unused vacation roll over from year to year in California?

Yes. In most cases, accrued but unused vacation carries over from year to year because California prohibits “use-it-or-lose-it” vacation policies. An employer may place a reasonable accrual cap on future earnings, but it generally cannot require employees to forfeit vacation they have already earned.

Can an out-of-state company apply a use-it-or-lose-it vacation policy to a California employee?

Usually not. Employees who work in California are generally protected by California’s vacation laws even if their employer is headquartered in another state. An out-of-state employer typically cannot avoid California’s prohibition on forfeiting accrued vacation simply by adopting a policy based on another state’s laws.

What happens if I hit my vacation accrual cap?

Once you reach your employer’s vacation accrual cap, you generally stop earning additional vacation time until you use some of your existing balance. After your balance falls below the cap, vacation accrual usually resumes according to the employer’s policy.

Can my employer take away vacation time that I already earned?

No. Once vacation is earned in California, it becomes a vested benefit. Employers generally cannot confiscate, cancel, or take away accrued vacation time simply because an employee failed to use it before a deadline.

Do California vacation laws apply to remote workers?

It depends on where the employee performs their work. Employees who primarily work in California are generally protected by California vacation laws, including the prohibition against use-it-or-lose-it policies. Remote workers who perform their work outside California may be governed by the laws of a different state.

Is paid sick leave subject to California’s use-it-or-lose-it rule?

No. California’s prohibition on use-it-or-lose-it policies applies to vacation and vacation-like PTO. Statutory paid sick leave is governed by different rules and generally does not have to be paid out when employment ends unless it has been combined with vacation in a single PTO bank.

Additional Resources

For more in-depth information, refer to these scholarly articles:

• The effect of paid vacation on health: evidence from Sweden – Journal of Population Economics.
• Vacation Pay: Theory vs. Practice – The CPA Journal.
• Work Hours, Wages, and Vacation Leave – ILR Review.
• Economic Analysis on Attributes of Workers and Method to Take Annual Paid Vacation – Journal of Human Resource and Sustainability Studies.
• Vacation Pay: Theory vs. Practice – Compensation & Benefits Review.

Legal References