Can Vacation Pay Be Less Than an Employee’s Regular Pay Rate?

The recent case of Bell v. H.F. Cox, Inc. addressed a number of key issues in wage and hour law, including the exemption to overtime requirements for interstate truckers.  One issue of more general importance, however, was the Court’s treatment of the company’s lump sum vacation policy.

The drivers in Bell received a lump sum of $500 per week during their vacation, rather than their usual (presumably much higher) rate of pay.  They sued as a class, alleging among other claims that they should be paid their usual pay during their vacation weeks.  Labor Code Section 227.3 requires that where an employee is terminated  with unused vacation time, a vacation benefits policy must provide for payment of  vacation time at an employee’s regular rate of pay.  This means that the lower lump sum would likely be found deficient, although the Court did not address the issue at this stage of the case.

Because vacation is not required by law, however, employers are free to pay current employees any amount they chose as vacation pay, as long as the amount is paid in accordance with the policy, and the policy does not cause employees to lose vested vacation benefits.

Employers should review their vacation pay policies to make sure that employees are paid all vested vacation benefits (including a pro rata share of the current year’s vesting) at the end of their employment, regardless of whether the employee quit or was terminated.  A plan that calls for reduced pay in vacation weeks for current employees, however, has passed muster.

This article is not offered as, and should not be relied on as, legal advice. You should consult an attorney for advice in specific situations.