California Court of Appeal Concludes Accrued Paid Time Off Need Not Be Identified in Wage Statements Until Employment Ends

In a win for employers, the California Court of Appeal recently held that employers are not required to include the monetary amount of accrued vacation pay or paid time off (PTO) in its employees’ wage statements until a payment is due.

In Soto v. Motel 6, Operating L.P., Case No. 37-2015-00017074-CU-OE-CTL, 2016 WL 6123927 (Cal. Ct. App. October 20, 2016), the plaintiff filed a representative lawsuit under the Private Attorney General Act of 2004, Labor Code § 2698 et seq. (PAGA), in her individual capacity and on behalf of all similarly aggrieved workers, alleging that her former employer, Motel 6, had violated Labor Code Section 226(a) (Section 226(a)) by failing to provide its California non-exempt employees with wage statements setting forth “all vacation and accrued PTO (paid time off) wages accrued during the applicable pay period.”  

The plaintiff contended that Section 226(a) requires the itemization of earned “wages” in wage statements and that other California cases — not addressing Section 226(a) — have recognized that vacation pay is a form of a “wage” which becomes vested during the pay period it accrues. The plaintiff argued that because Motel 6 failed to identify accrued and unused vacation or paid time off in non-exempt employees’ regular wage statements it violated Section 226(a) and therefore sought statutory penalties and attorneys’ fees. 

The Court of Appeal agreed that an employee has vested rights to paid vacation or “vacation wages” during the time of his or her employment, but explained that under Labor Code Section 227.3 those rights do not ripen or become an entitlement to receive the monetary value of the benefit as wages until the termination of the employment relationship. The Court further explained that, because an employee is entitled to obtain the value of unused paid vacation at his or her “final rate,” the amount of “vacation wages” to which an employee is entitled is not ascertainable until termination of employment.

The Court of Appeal noted that its interpretation was also consistent with the statutory purpose of Section 226(a), which is to document the specific wages being paid to the employee at the time of the payment so that the employee is adequately informed about his or her compensation and has a basis to challenge any shortfall. Thus, the Court held that “[i]f an employer is not required to compensate an employee for unused vacation in a particular paycheck, there is no statutory duty to identify the monetary amount of the accrued vacation balance.” The Court further held that its conclusions applied equally to accrued and unused PTO for California employers who provide PTO rather than vacation leave.

An Additional Takeaway

Although accrued vacation or PTO is not required to be paid until termination of employment, and that is what the Court focused on, one reasonable conclusion to draw from the Court’s analysis is that whenever an employer pays out accrued vacation or PTO, such as if the employer has a policy of paying out rather than carrying over accrued and unused vacation or PTO at the end of a year, the employer should itemize that payment(s) in the wage statement accompanying the payment(s) in order to avoid violating Section 226(a).