California Pay Day Statements and Accrued Vacation—“Nothing so Exhilarating as Being Shot at Without Result”
What does Winston Churchill have to do with California wage and hour requirements? Well, the “shot” at employers in Soto v. Motel 6 Operating L.P. at the California Court of Appeal was whether, because California vacation pay cannot be forfeited and must be paid out at termination, it therefore follows that the value of the accrued vacation needed to be identified on the regularly issued pay day statement.
As employers with California employees know, Labor Code Section 226 contains a lengthy list of things that must be identified on the statement issued to employees with their paychecks each pay day. Some other statutes, most notably Labor Code Section 245(h), require other items to be reported on the pay day statement. California law also provides that vacation time and pay accrue and vest as wages when the work (on which the vacation accrual is based) is performed. Moreover, the accrued but unused vacation must be paid as part of final wages.
Ms. Soto’s counsel brought a California Private Attorney General Act (PAGA) claim asserting that the value of the accrued but unused time off was required to be itemized on the payday statement even though not specifically articulated in the statute. The theory was that, if wages must be listed on the statement, then deferred wages like vacation, Paid Time Off (PTO), and other forms of time off compensation were required to be itemized as well by the statute. Besides, the argument continued, without that itemization how would an employee know how much vacation remained in his or her account?
The practical problem of employers with California employees was that almost no one reports accrued vacation in that fashion. That, in turn, meant that if the court agreed with Plaintiff, the litigation tsunami unleashed would have been nearly unprecedented. As the title of this post implies, the court rejected the employee’s interpretation and found that Labor Code 226 does not require itemization of the value of accrued vacation. That is how the Winston Churchill quote enters and perhaps departs the conversation.
Although California employers may rightly enjoy the moment, they may do well to consider whether it may be worth revisiting the vacation reporting issue as a planning and management issue. First, this is but one court of appeal decision and may well be appealed to the California Supreme Court. Second, although probably safe for the remainder of the election year, the legislature may well re-visit the issue. The reason is that when California adopted mandatory paid sick leave, it included a requirement that those balances be listed on the pay day statement. Hence the reference to Labor Section Code 245(h) above. The rationale for doing so was very similar to the Plaintiff’s “employee knowledge” theory in the Motel 6 case.
A reason for perhaps giving consideration to this now is that if the law evolves in the direction of requiring reporting, implementation will be complicated. First, the quantity of vacation time may well accrue at a different pace for people in the same job, but with different levels of employment duration. Second, the actual value of the accrued vacation is not static because the value of the vacation time will fluctuate as the value of the employee’s compensation fluctuates. Third, there will be other practical issues with how vacation is credited and charged in an environment where “getting it right” (on a pay period by pay period basis) carries with it some class action risk management importance. Again, nothing is likely to happen this year but, in terms of budgeting, employers with California employees may want to start thinking about it for 2017/2018.