Updated January 5, 2026
Understanding California Labor Code 227.3
California Labor Code 227.3 is a crucial regulation that governs the payment of vacation time upon termination of employment. This law is particularly significant for employees who have accrued vacation time but have not utilized it by the time they leave their job. Understanding this code is essential for both employees and employers to ensure compliance and protect workers’ rights.
Overview of Labor Code 227.3
California Labor Code 227.3 stipulates that if an employment contract or company policy provides for paid vacations, any unused vacation time must be compensated as wages upon termination. This means that employees are entitled to receive payment for any vacation days they have accrued but not taken when they leave their job, whether through resignation, termination, or other means.
Key Provisions
- Paid Vacation as Wages: The law treats accrued vacation time as earned wages. Therefore, employees cannot lose their vacation pay simply because they did not take the time off.
- No Forfeiture Policies: Employers cannot implement policies that require employees to forfeit their accrued vacation time upon termination. This prohibition ensures that employees are compensated for their earned benefits.
- Final Rate of Pay: The payment for unused vacation time must be calculated based on the employee’s final rate of pay, ensuring that they receive fair compensation.
Importance of Vested Vacation Time
Vested vacation time refers to the vacation days that employees have earned and are entitled to use or be compensated for. Under California law, vacation time vests as it is accrued, meaning that employees earn their vacation benefits over time.
How Vacation Time Vests
- Accrual Process: Employees earn vacation time based on their length of service and the company’s vacation policy. For instance, if an employee is entitled to two weeks of vacation per year, they accrue vacation days gradually throughout the year.
- Impact of Termination: If an employee leaves their job without using their accrued vacation, they are entitled to receive payment for those days. This provision protects employees from losing their earned benefits.
Collective Bargaining Agreements and Exceptions
While Labor Code 227.3 provides strong protections for employees, there are exceptions, particularly for those covered by collective bargaining agreements (CBAs).
Clear and Unmistakable Waiver
In cases where a CBA exists, the agreement must explicitly waive the right to immediate payment for accrued vacation time. The California courts have established that a waiver must be clear and unmistakable, meaning that employees should not have to guess about their rights regarding vacation pay.
Implications for Employees
- Understanding CBAs: Employees covered by a CBA should carefully review their agreements to understand their rights concerning vacation pay. If the agreement does not clearly state the terms regarding vacation time, employees may still be entitled to payment under Labor Code 227.3.
- Legal Guidance: It is advisable for employees to seek legal counsel if they are unsure about their rights under a CBA or if they believe their employer is not complying with the law.
Employer Obligations Under Labor Code 227.3
Employers have specific responsibilities when it comes to managing vacation time and ensuring compliance with Labor Code 227.3.
Accurate Record-Keeping
Employers must maintain accurate records of employees’ accrued vacation time. This includes tracking how much vacation each employee has earned and used, as well as any remaining balance upon termination.
Payment Upon Termination
When an employee leaves the company, employers are required to calculate and pay out any unused vacation time at the employee’s final rate of pay. Failure to do so can result in legal consequences, including potential claims for unpaid wages.
Avoiding "Use It or Lose It" Policies
Employers should refrain from implementing "use it or lose it" policies, which require employees to forfeit unused vacation days after a certain period. Such policies are illegal under California law and can lead to disputes and legal action.
Dispute Resolution for Vacation Pay Claims
If disputes arise regarding vacation pay, employees have several avenues for resolution.
Filing a Claim
Employees who believe they have not been compensated for their accrued vacation time can file a claim with the California Division of Labor Standards Enforcement (DLSE). The DLSE will investigate the claim and determine whether the employer has complied with Labor Code 227.3.
Legal Action
In some cases, employees may need to pursue legal action against their employer to recover unpaid vacation wages. This can involve filing a lawsuit in civil court, where the employee can seek compensation for their lost wages and any additional damages.
Conclusion
California Labor Code 227.3 plays a vital role in protecting employees’ rights regarding vacation pay. By ensuring that accrued vacation time is treated as earned wages, the law provides essential safeguards for workers. Both employees and employers must understand their rights and obligations under this code to foster a fair and compliant workplace.
If you believe your rights under Labor Code 227.3 have been violated, it is crucial to seek legal assistance. An experienced employment lawyer can help you navigate the complexities of the law and ensure that you receive the compensation you deserve.
If you need employment litigation, call Setyan Law at (213)-618-3655. Free consultation.
