Under a "use it or lose it" policy, an individual who does not use all of his or her accrued vacation pay by a particular time forfeits the right to be paid fro those days at a later date. The California Supreme Court held, however, that vacation pay vests as it is earned, and any vacation earned cannot be taken away. Vacation pay is, in effect, additional wages for services performed, the receipt of which is postponed. Thus, this "use it or lose it" policy is unlawful.
Further, an employer may not force an employee to use accrued vacation time rather than serve out the term of his employment. Vacation pay that is not used continues to accumulate unless the vacation policy contains a "cap" on accruals. A "cap" precludes the employee from accruing additional vacation time after a specified amount has been accumulated.
Under California Labor Code section 227.3, unless otherwise provided by a collective bargaining agreement, an employee who is terminated without having taken all accrued vacation time must be paid for the vacation time as wages to his final rate of pay.
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