California's Sixth District Court of Appeal has established a four-part test for determining whether paid time off must be treated as vacation. Paton v. Advanced Micro Devices, Inc. No. H034618 (Aug. 5, 2011). The decision is significant because it provides guidance to California employers regarding the circumstances under which unused paid time off benefits must be paid out upon termination.
In this case, plaintiff never took, an eight week paid sabbatical. According to the employer's sabbatical program, the paid leave would be forfeited if it was not used while the employee remained with the company. When the plaintiff resigned and did not receive any payment for his unused sabbatical, he brought a class action lawsuit claiming that the sabbatical was the same thing as extra vacation for long-term employees. As a result, he argued that the unused paid time off should be paid to him upon termination, just as he would be paid for accrued and unused vacation.
The appellate court reversed the lower court’s granting of summary judgment in favor of the employer. The court of appeals held that the question of whether the employer's sabbatical program granted a legitimate sabbatical (which does not have to be paid out upon termination), or was actually additional vacation time, could not be answered based upon the facts before it.
While an employer is not required to offer paid vacation as a benefit, if an employer decides to do so, it must comply with the laws covering vacation accrual, vesting, and payment. In California, "use it or lose it" vacation policies are illegal and earned but unused vacation must be paid out upon termination.
The Court of Appeals defined vacation as paid time off that accrues in proportion to the length of the employee's service, is not conditioned upon the occurrence of any event or condition, and usually does not impose conditions upon the employee's use of the time away from work. The Court then set forth a new “Four-Part Test” for sabbaticals, in order to explain what makes a sabbatical different from a vacation:
- Frequency - leave that is granted infrequently tends to support the assertion that the leave is intended to retain experienced employees who have devoted a significant period of service to the employer;
- Length - the length of the leave should be longer than that "normally" offered as vacation;
- Additional benefit -a legitimate sabbatical will always be granted in addition to regular vacation, and the regular vacation should be comparable to that offered by comparable employers; and
- Return to work - since a sabbatical is designed to retain valued employees, a legitimate sabbatical program should incorporate some feature that demonstrates that the employee taking the sabbatical is expected to return to work for the employer after the leave is over.
Although not identified as a separate factor, the court's analysis also looked to the purpose of the paid time off. If the purpose is for rest and relaxation, then it falls under the category of vacation, but if the purpose is to retain valued employees who will use the leave to enhance their value to the company upon return from leave, then the leave may qualify as a true sabbatical.
The court found conflicting evidence on the employer's purpose in establishing the sabbatical program at issue, and the court therefore remanded the case to the trial court for determination fact.
Employers should review their policies and procedures and be clear regarding which types of time off must be paid out upon termination, and should also state the purpose for which a particular paid time off benefit may or may not be used.