California has some of the most generous leave laws and ordinances in the United States, but it wasn’t always this way. The landscape of paid leave has changed drastically in California in the last two decades and continues to evolve. In my employment practice, I’ve advised clients ranging from sole proprietors hiring their first employees to multi-national companies considering cross-border impacts of proposed policies. The questions I get about leave in California vary widely from, “Is vacation required?” (It’s not.) to, “How do I switch to unlimited PTO?” (It’s more nuanced but something a lot of employers have done.)
This article focuses on the concepts of paid sick leave, vacation, and paid time off and summarizes how these forms of leave have evolved and currently operate under California law.
The Beginning
While paid sick leave is now required everywhere in California, it hasn’t been the case for that long. In 2006, San Francisco became the first city in the United States to require paid sick leave by passing and implementing its Paid Sick Leave Ordinance (“PSLO”). The hallmarks of the PSLO included accrual of paid sick leave at a rate of one hour for every thirty hours worked (with properly classified exempt workers treated as having worked forty hours per workweek regardless of actual hours worked) as well as different accrual caps for small (less than ten) and large (ten or more) employees.
Nearly a decade later, California passed the Healthy Workplaces, Healthy Families Act of 2014 (the “Act”). The Act made the granting of paid sick leave mandatory for all employees regardless of employer size beginning on July 1, 2015. Similar to the PSLO, the Act required the granting of paid sick leave at the same one-hour-per-thirty-hours-worked rate, but it also allowed employers to satisfy its requirements by making an annual lump-sum grant of twenty-four hours to employees. The Act further set a single accrual cap at forty-eight hours regardless of employer size.
Following passage of the Act, various other municipalities – including but not limited to Emeryville, Oakland, Berkeley, Los Angeles, Santa Monica, and San Diego – enacted their own paid sick leave ordinances. While the Act continues to create the baseline for paid sick leave for any statewide employer, companies with workers throughout California must be mindful of various local ordinances to ensure they comply with any requirements that may affect their workers. Most local ordinances will apply to remote workers who spend sufficient minimum time working remotely within their jurisdictions.
Despite the evolution and expansion of paid sick leave, California remains in the minority of states in the United States that require paid sick leave. As of 2023, only fourteen states and Washington D.C. require paid sick leave in some form.
Sick Leave, Vacation, Paid Time Off, and the Payment of Wages
As noted above, the granting of accrued paid sick leave is mandatory in California while the granting of vacation leave is not. Nevertheless, granting some amount of vacation leave is a standard practice at most companies.
As an alternative, some employers choose to use a single form of paid time off, or “PTO,” that can be used for sick, vacation, or other personal leave. PTO presents the administrative convenience to employers of tracking a single form of accrued leave and use. It further typically satisfies paid sick leave requirements in most jurisdictions so long as it is granted at a sufficient minimum rate based on hours worked and the employee can also accrue sufficient minimum PTO up to or beyond whatever accrual cap is in effect in that jurisdiction for paid sick leave.
The treatment of accrued leave at the end of employment can be an area of significant liability for employers, and not all forms of leave are equal under California law. Pursuant to Labor Code section 201, “wages earned” are payable either immediately in the case of an involuntary termination or within seventy-two hours in the case of a voluntary resignation without prior notice. These “wages” include “unused or accumulated vacation, annual leave, holiday leave, or time off,” but do not include accrued paid sick leave. Consequently, for employers that grant paid sick and vacation leave, only accrued vacation must be paid out at the end of employment, while for employers that use an accrued PTO system, all accrued leave must be paid out at the end of employment.
The Dawn of “Unlimited” PTO
The mid-2010s saw a number of larger companies – beginning with those in tech – creating and implementing “unlimited” PTO policies. Under these policies, companies began to make PTO generally available to employees whenever they wanted and eliminated accrued leave. Of course, the catch was and remains that employees were still expected to meet performance metrics, which themselves serve as an informal limitation on PTO truly becoming “unlimited.”
While these policies may benefit employee morale and, if administered fairly, provide more generous and flexible benefits to employees, they also provide a significant benefit to employers. Namely, if there is no accrued PTO then the employer may not have any obligation to pay out any additional wages beyond what is owed for the final pay period in a termination of employment scenario. (See, e.g., McPherson v. EF Intercultural Foundation, Inc. (2020) 47 Cal.App.5th 243, 268-269.) This differs drastically from a situation where a long-term employee may have accrued a generous amount of vacation that remained unused at the end of employment. For larger companies, this could result in millions or even tens of millions of dollars saved annually.
Employers instituting or transitioning to unlimited PTO must still be aware of additional administrative requirements. Pursuant to Labor Code section 246(i), “[a]n employer shall provide an employee with written notice that sets forth the amount of paid sick leave available, or paid time off leave an employer provides in lieu of sick leave, for use on . . . the employee’s itemized wage statement.” For employers using unlimited PTO, the word “unlimited” or a similar notation indicating PTO is unlimited must be displayed where the accrued PTO balance would usually be placed on a paystub. Alternatively, employees can be provided with a separate written document indicating PTO is unlimited. Failure to satisfy this requirement could result in liability, including under California’s Private Attorneys General Act (or “PAGA”) if the omission affects multiple employees.
Conclusion
Paid leave in California has evolved significantly over the past two decades. As society continues to transition out of the COVID-19 pandemic, it remains to be seen whether the preference for remote work will last or if workers will slowly return to the office at or near pre-pandemic levels. If remote work continues, further changes will likely occur regarding the structuring of paid leave and other aspects of work-life balance. As such, attorneys advising employers in California and elsewhere should stay abreast of developments in this area of the law.
Ryan Stahl is a partner at Scherer Smith & Kenny LLP in San Francisco. His practice focuses on employment litigation and counseling for both employers and employees.
