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Liability Limits Take A Vacation:The Impact of Church v. Jamison on Employee Vacation Claims in California

By Robert S. Nelson, Esq.

Nelson Law Group

Just in time for the holidays, a recent decision by a California appellate court may dramatically expand employer liability for unpaid employee vacation.

In Church v. Jamison, the Court of Appeal for California’s Fifth Appellate District decided that employees can sue for all accrued-but-unused vacation they have when their employment is terminated, even if it was earned outside the applicable statute(s) of limitations. This decision contradicts prior law that said that employees can only sue for accrued vacation that is within the applicable statute(s) of limitations, up to a maximum of four years. Employers should therefore be careful to either prevent employees from accruing exorbitant amounts of unused vacation, or pay whatever is owed promptly upon termination of employment. They should also ensure that any vacation limits they impose are in fact lawful; if vacation caps are invalidated, then employees will be credited with (and employers may be required to pay) whatever vacation the employees earned during the entire duration of their employment.

Church involved a unique arrangement in which an employee, John Church, agreed to forego taking salary and other benefits in the beginning of his employment on the understanding that whatever he earned would later be credited toward purchasing an ownership interest in his employer’s business. During his first year of employment, Church earned approximately 10 days of paid vacation which he never used. Church and his employer, Wilcox, Hokokian & Jackson (“WHJ”), an accounting firm, were unable to agree to terms for Church to buy into the business, so Church’s employment was terminated. Church sued WHJ for all the pay and benefits he earned during his first year, including accrued vacation. Church’s lawsuit was filed less than a year after his employment was terminated, but more than three years after he earned the last of the vacation benefits that he was never paid.

WHJ argued that a two-year statute of limitations should apply to Church’s vacation claim. The length of a statute of limitations depends on the type of claim at issue: because Church had a vacation agreement that had never been committed to writing, WHJ argued that the two-year statute applicable to oral contract claims should apply; had Church had an agreement in writing, then the four-year statute for written agreements likely would have applied. In any event, the court held that because Church had filed his case within a year after he left WHJ, the case was clearly timely. What was not so certain was whether the statute of limitations should be applied twice to limit the amount of vacation that Church could attempt to recover.

Prior to the Church case, courts and administrative agencies generally used a two-step analysis when applying statutes of limitations to vacation claims: at step one, the statute(s) of limitations would be applied to determine whether a case had been filed on time; if it was, the statute(s) would be applied again to limit the amount of recoverable vacation to only that which fell within the applicable limitations period. For example, if an employee with an oral employment contract (and therefore a two-year statute) was fired in November 2005 and filed a lawsuit in November 2006 seeking unpaid vacation, a court would first determine whether the case was filed on time. If it was, the court would then extend the statute of limitations backward from the date of filing (e.g., November 2006 to November 2004), and only vacation earned within that time could be part of the claim (e.g., November 2004 to 2005). The logic was that the statute of limitations should start running as soon as vacation was earned, so from the moment an employee accrued and could use vacation, the clock started ticking on when he or she could sue to recover it.

This rule can be traced to a 1987 Interpretive Bulletin from the Division of Labor Standards Enforcement (“DLSE”), the government entity that administers and enforces California’s wage-and-hour rules, including vacation rights. The Interpretive Bulletin said that the statute of limitations should begin running at the time vacation vests because “the obligation to use vacation arises as it is earned…”. In the 1995 case Sequeira v. Rincon-Vitova Insectaries, Inc., a California appellate court adopted the DLSE’s logic almost verbatim on grounds that the agency’s interpretation “is entitled to great weight…unless it is clearly unreasonable…”

In Church, however, the court was much less convinced by the DLSE’s logic. To begin with, the Church court noted that “the DLSE’s expertise does not extend to…the application of statutes of limitation.” As such, the court gave “no weight” to the DLSE’s position. The court then explained that the DLSE’s interpretation did not make sense because: (1) the Labor Code says that employers are required to pay employees “all” vested vacation, not just that which falls within the statute of limitations; (2) double use of the statute of limitations was “without precedent” when the DLSE first tried it; and (3) employees cannot be required to sue for vacation as it accrues because they do not yet know whether their employers will refuse to pay the vacation or not. It is that refusal which wrongs the employee and thereby triggers the statute of limitations. Until that happens, the court reasoned, “no claim accrues and no statute begins to run at the time vacation is earned.”

What does Church mean for employers? Mainly that they should be extremely careful with long-term employees who do not use much vacation. Employers face myriad risks with long-standing employees: (1) if vacation accrual limits are not in place, long-term employees continue accruing vacation throughout the duration of their employment; (2) even if limits are in place, employees will continue accruing in perpetuity if the limits are not lawful; and (3) even if lawful accrual limits are imposed, long-term employees often accrue vacation at a much higher rate than less senior employees; it is not uncommon for employees with more than 15 or more years seniority to accrue four, five, six (or more) weeks of vacation per year. In any event, long-term employees often have substantial amounts of accrued vacation that must be paid out when their employment is terminated. If employers fail to pay, they can be held liable for whatever accrued-but-unused vacation the employees had at the time of termination. Prior to Church, the most this could be was two-to-four years’ worth of vacation accruals. After Church, however, it can be for the full time that long-term employees worked, be it five years, 10, 15 or more.

So what should employers do in light of Church? Briefly summarized, they should:

  • Enact written rules limiting vacation accruals.

Clear vacation policies, including accrual limits, should be included in employee handbooks and/or written personnel policies. This is the only lawful way that employers in California can limit employees’ accrued vacation. “Use-it-or-lose-it” vacation policies are not allowed.

  • Make sure existing vacation accrual limits are valid.

Accrual limits must give employees a reasonable amount of time after vesting to actually use accrued vacation. The DLSE traditionally said that 1.75 years was the lowest point at which employers could impose accrual limits. Policies that say that vacation must be used in the same year in which it is earned generally will be deemed unlawful.

  • Encourage employees to use accrued vacation.

Vacation is given so that employees can rest and recharge, something that theoretically benefits employers as much as it does employees. To that end, employers want to encourage employees to actually use their accrued vacation, rather than hoarding it in anticipation of a big payout. Employers can do this by setting accrual limits as low as possible, and by refusing to give employees cash payouts for accrued vacation, except upon termination of employment.

  • Promptly pay vacation upon termination.

In California, accrued-but-unused vacation is treated as a vested benefit that belongs to employees. As such, it must be fully paid out promptly upon termination of employment, the same as if it was salary or wages that employees were still owed.

Robert S. Nelson is the founder of the Nelson Law Group, a San Bruno, California based law firm specializing in labor and employment matters. He regularly drafts vacation policies and accrual limits for California employers. He can be reached at 415-689-6590, or [email protected].