Recently the 2nd District Court of Appeals ruled against Lexmark International, Inc., that its vacation policy violated California Labor Code Section 227.3 which states in pertinent part that an employer’s vacation policy “shall not provide for forfeiture of vested vacation time” and awarded plaintiffs $13 million. Under California law and as affirmed by the court, “vacation pay is a form of deferred compensation” that cannot be forfeited under “use it or lose it” policies. In this case a senior account manager, Ron Molina, sued the company alleging that a policy change violated California law and deprived employees of earned vacation.  Molina sought damages and injunctive relief on behalf of a class of sales and account managers, alleging that Lexmark failed to pay wages for accrued vacation time and failed to pay vacation wages when a worker was terminated.  Prior to 2006, Lexmark’s vacation policy required employees, barring a business needs, to use all vacation by the end of a given year and capped vacation accrual at 240 hours.  The court ruled that while the 240 hour cap was legal the requirement that all vacation be used unless an employee could adequately demonstrate that business needs prevented them from using all accrued vacation, constituted an illegal forfeiture of vested wages. The court also addressed the issue of notifying employees of policy changes.  In 2006 Lexmark changed its vacation policy in that employees were expected to use their vacation by the end of the year but if business needs prevented them from doing so, they could carry over the time.  Under this policy there was no forced forfeiture of vacation and employees are not required to demonstrate a “business need” in order to maintain their bank of available vacation time.  However, Lexmark never notified employees of the change in policy and the court ruled that a failure to notify is “sufficient to raise the inference that there was no real change in what … was determined to be their forfeiture policy.  As part of the ruling Lexmark was ordered to notify employees in writing of the change in vacation policy.  Lastly, the court also ordered the company to maintain a system to track vacation time. Recommendations:
  1. Review vacation policies to ensure that they do not violate state law prohibiting use it or lose it provisions.  Currently, California, New York and to some degree Illinois have such policies.  Many other states have statutes that prohibit a use it or lose it approach if there is an agreement to the contrary or company implied or express policy appears otherwise.
  2. Make sure that all policies are properly communicated to employees.  We recommend that a written memo be created for any major policy change and each employee be provided a copy of the memo and that each individual sign and date the memo indicating they received and read it.  That signed and dated memo should be placed in their personnel file and a copy given to the employee.