Alert: California Court Allows Partial-Day Vacation Without Defeating Exemptions

July 25, 2005

A California Court of Appeal has held that employers may require employees to use accrued vacation for partial-day absences without defeating the salary basis element of their overtime exemption.  Conley v. Pacific Gas and Electric Company, (C.A. 1st 07-22-2005).  Rejecting a position publicly asserted by the Division of Labor Standards Enforcement ("DLSE"), the court held that expending vacation accrual does not undermine the argument that an employee is receiving a guaranteed salary.  Though this decision is consistent with federal authorities, the DLSE had opined the opposite based upon the unique protections to vacation provided under California law.  New Labor Commissioner Donna Dell recently indicated a desire to reconsider the DLSE's position, but this decision moots her reconsideration.

In Conley, PG&E's express policies required that employees expend accrued vacation for partial-day absences.  A plaintiff seeking class representative status argued that this policy defeated any argument that the subject employees were guaranteed a salary because, under California law, deducting vacation accrual was tantamount to deducting salary — i.e., the guaranteed salary included the right to vacation accrual.  The court rejected this argument, holding that there is "nothing in California law that precludes employers from following the federal rule that permits them to require the use of vacation leave for partial-day absences without causing otherwise exempt employees to become non-exempt under the salary basis test."  Holding that the contrary DLSE opinion letters did not carry the force of law, the court held that California law does not restrict "the employer's right to control the scheduling of its employees' vacations."  The court did, however, suggest that employers may not prevent exempt employees from taking partial-day absences even if they lack accrued vacation.

This decision should affect many employers, who have thus far declined to use partial-day vacation deductions for exempt employees.  Employers may wish, however, to remain cautious of using vacation accrual to account for each hour in an exempt employee's workday.  In addition to undermining morale, such close monitoring may still suggest that the employee is being monitored based upon hours rather than work product, which is inconsistent with most exempt classifications.  Moreover, the court did not opine whether employers may establish vacation bank deficits based upon partial-day absences.

The Conley decision also raises but does not answer the question of the extent to which a California employer may mandate its employees' vacation schedules.  Previously, the DLSE has opined that employees must be given at least 9 months notice of a need to take their vacation. Commissioner Dell has recently moderated that position to require that employers provide "reasonable notice" of an employee's need to take vacation, which Commissioner Dell describes as "...as far in advance as possible but generally no less that one full fiscal quarter or 90 days, whichever is greater."  Yet, the above-quoted language in the Conley decision might be interpreted as suggesting that employers enjoy greater discretion in mandating vacation.

Therefore, although the Conley decision seems to provide greater flexibility for employers who wish to revise their vacation policies, employers should consult with employment counsel before implementing any changes to vacation policies or imposing greater restrictions on employees’ vacation benefits.