Legality of unlimited PTO policies addressed for the first time by California courts

April 30, 2020

Employment Law Alert

Author(s): Hillary Baca, Andrea Chavez

Earlier this month, the California Court of Appeal in McPherson v. EF Intercultural Foundation, Inc.[1] issued the state’s first published opinion addressing the legality of unlimited paid-time-off (PTO) policies. This long-awaited decision provides important guidance to employers who have opted to provide employees with unlimited PTO.

California state and federal law do not require employers to provide employees with PTO. When an employer does have a PTO policy, however, Labor Code Section 227.3 requires the employer to pay as wages any “vested” but unused vacation time upon termination. In recent years, unlimited PTO policies have gained popularity among California employers, who have largely operated on the assumption that Section 227.3 does not apply to such policies. The employers have reasoned that PTO does not vest under an unlimited policy, and as such, there was no “vested” time to payout upon termination. However, due to the lack of guidance on the issue, employers were largely operating with uncertainty, until this month. The McPherson decision is the first published decision to address the legality of unlimited PTO policies.

The McPherson case

In McPherson, the employees brought action against their former employer, claiming that it failed to pay them accrued but unused vacation wages upon termination. The employer claimed that its policy provided for unlimited PTO with no accruals, so there was nothing to pay upon termination.

The Court of Appeal upheld the trial court’s finding that, based on the particular set of facts, the employer’s “unlimited” PTO policy was subject to Section 227.3 because it was unwritten, was not unlimited in practice, and was never conveyed as unlimited to plaintiffs. The court noted that the employer’s PTO policy had an implied cap where the employer expected employees to take vacation in the range typically available to corporate employees (such as two to six weeks), and the employees’ work schedules precluded them from taking advantage of any purported “unlimited” policy.

The Court of Appeal limited its holding to the facts of the case, stating that it does “not hold that [S]ection 227.3 necessarily applies to truly unlimited time-off policies.”[2]

Providing further guidance, the court stated that an unlimited PTO policy might not trigger Section 227.3 if it:

  • Is in writing
  • Clearly provides that employees’ ability to take PTO is not a form of additional wages for services performed, but part of the employer’s promise to provide a flexible work schedule, including employees’ ability to decide when and how much time to take off
  • Spells out the rights and obligations of both the employees and the employer and the consequences of failing to schedule time off [3]
  • In practice, allows sufficient opportunity for employees to take time off, or work fewer hours in lieu of taking time off
  • Is administered fairly, so that it neither becomes a de facto “use-it-or-lose-it policy” nor results in inequities, such as where one employee works many hours, taking minimal time off, and another works fewer hours and takes more time off [4]

Employer takeaways

Although the above guidance is helpful, there are many open questions as to the lawfulness of unlimited PTO policies. Employers should contact an employment attorney to ensure their unlimited PTO policies are carefully drafted and, at a minimum, account for the guidance set forth in McPherson.

  1. McPherson v. EF Intercultural Foundation, Inc. (Cal. Ct. App., Apr. 1, 2020, No. B290869) 2020 WL 1543339. [Back to reference]
  2. Id. at 14. [Back to reference]
  3. While the court did not offer guidance as to this factor, presumably this would require the employer to explain that if the employee does not schedule time off, PTO will not vest and accrue. [Back to reference]
  4. Id. [Back to reference]

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