Under an employment policy providing for annual paid vacations, when does the right to a vacation "vest?"
The following facts are not in dispute. Francisco Suastez, respondent, was employed by the appellant, Plastic Dress-Up Co. (Plastic Dress-Up), from October 16, 1972, until July 20, 1978. Throughout this time, and in accordance with its regular policy, the company paid Suastez weekly wages based on his hourly wage. Additionally, it provided certain fringe benefits, including holiday and vacation pay.
The company's vacation policy provided that each employee was entitled to between one and four weeks of paid vacation annually, depending on the length of his or her employment.
Midweek in July of 1978, Suastez's employment was terminated. The company paid him $68.79 as net wages for the part of the week that he had worked.
After a hearing, the court dismissed the complaint for lack of subject matter jurisdiction, finding that Suastez had failed to exhaust his administrative
Suastez filed a second suit in the superior court. Plastic Dress-Up moved for summary judgment based on the parties' stipulations of fact and the transcript of the first hearing. Suastez, in turn, filed a cross-motion for summary judgment.
The trial court granted Suastez's motion, holding that section 227.3 required the company to pay Suastez the vacation pay due him "on the basis of time served." The court also awarded costs to Suastez. Plastic Dress-Up appeals from this decision.
Section 227.3 provides, in part, that whenever an employee is discharged "without having taken off his vested vacation time, all vested vacation shall be paid to him as wages at his final rate in accordance with ... [the] employer policy respecting eligibility or time served...." It cautions further "that an employment contract or employer policy shall not provide for forfeiture of vested vacation time upon termination." The only issue raised by this appeal is when vacation time becomes "vested" under section 227.3.
The company argues that, under its vacation policy, employees are not eligible for any vacation pay unless they are still employed on the anniversary of the day they began work.
When considering the meaning of the phrase "vested vacation time" as used in section 227.3, it is important to keep in mind the nature of vacation pay.
"Many tribunals have taken the view that vacation pay is simply an alternate form of wages, earned at the time of other wages, but whose receipt is delayed." (Local U. No. 186, Packinghouse F. & A. Wkrs. v. Armour & Co. (6th Cir.1971) 446 F.2d 610, 612, cert. den., 405 U.S. 955 [31 L.Ed.2d 231, 92 S.Ct. 1170]; see, e.g., Schneider v. Electric Auto-Lite Company (6th Cir.1972) 456 F.2d 366, 371; United States v. Munro-Van Helms Company (5th Cir.1957) 243 F.2d 10, 13; Valeo v. J.I. Case Co. (1963) 18 Wis.2d 578, 583-587 [119 N.W.2d 384, 387-389], and cases cited therein.)
In this respect, vacation pay is similar to pension or retirement benefits, another form of deferred compensation. Those benefits, too, "do not derive from the beneficence of the employer, but are properly part of the consideration earned by the employee." (In re Marriage of Fithian (1974) 10 Cal.3d 592, 596 [111 Cal.Rptr. 369, 517 P.2d 449].)
Similarly, since the consideration for an annual vacation is the labor performed throughout the year, an employee whose employment is terminated midyear has not earned a full vacation. Nonetheless, the employee has earned some vacation rights "`as soon as he has performed substantial services for his employer'" (Miller, supra, 18 Cal.3d at p. 815, quoting Kern v. City of Long Beach (1947) 29 Cal.2d 848,
Courts in other jurisdictions which have considered whether discharged or striking employees have a "vested" right to a pro rata share of vacation pay have uniformly held that the right vests as services are rendered. "`It is beyond dispute that an agreement to pay vacation pay to employees made to them before they performed their services, and based upon length of service and time worked, is not a gratuity but is a form of compensation for services, and when the services are rendered, the right to secure the promised compensation is vested as much as the right to receive wages or other form of compensation.'" (Livestock Feeds v. Local Union No. 1634 (1954) 221 Miss. 492, 502-503 [73 So.2d 128, 132], quoting Textile Workers Union v. Paris Fabric Mills (1952) 18 N.J.Super. 421 [87 A.2d 458, 459], affd. 22 N.J.Super. 381 [92 A.2d 40, 41]; accord Valeo v. J.I. Case Co., supra, 18 Wis.2d at pp. 585-586 [119 N.W.2d at p. 388]; see the discussion of the trend to grant vacation on a pro rata basis to laid-off employees in Amalg. Butcher Workmen Loc. Un. No. 641 v. Capitol Pack. Co. (10th Cir.1969) 413 F.2d 668, 672, fn. 5.) Like the California courts' treatment of pension rights, these courts sometimes caution that the right to a vacation, even if vested, may be forfeited if a condition subsequent is not met.
If vacation pay "vests" as it is earned, the company's requirement of employment on an anniversary date cannot prevent the right to pay from vesting. At most, it is a condition subsequent which attempts to effect a forfeiture of vacation pay already vested. (Cf. Miller v. State of California, supra, 18 Cal.3d at pp. 815-817.) Under section 227.3, of course, such a forfeiture is forbidden: "an employment contract or employer policy shall not provide for forfeiture of vested vacation time upon termination." (Italics added.)
The company argues, though, that its eligibility requirement is not merely a condition subsequent that would effect a forfeiture of vested
These cases, however, were decided before the enactment of section 227.3, and never considered the question of when and whether the right to vacation pay vested.
The language of section 227.3 does not support a contrary result. The company relies on this passage from the statute: "all vested vacation time shall be paid to [the employee] as wages at his final rate in accordance with such contract of employment or employer policy respecting eligibility or time served. ..." (Italics added.) The company contends
Finally, it is noted that further support for this interpretation of the statute may be found in the Legislature's 1976 amendment to section 227.3. (Stats. 1976, ch. 1041, § 2, p. 4653.) That amendment added this sentence: "The Labor Commissioner or a designated representative, in the resolution of any dispute with regard to vested vacation time, shall apply the principles of equity and fairness."
Even before the enactment of section 227.3, California courts had applied the principles of equity and fairness to allow laid-off employees to recover pro rata vacation benefits in certain circumstances. Courts have allowed recovery for vacation pay despite the fact that contract eligibility requirements were not met, if the employee had substantially performed. (Div. Labor L. Enf. v. Ryan Aero. Co. (1951) 106 Cal.App.2d Supp. 833 [236 P.2d 236, 30 A.L.R.2d 347]; see Division Labor L. Enf. v. Standard Coil etc. Co., supra, 136 Cal. App.2d Supp. at pp. 924-925; Div. of Lab. L. Enf. v. Mayfair Mkts., supra, 102 Cal. App.2d Supp. at pp. 948-949; cf. Division of Labor Law Enforcement v. Transpacific Transportation Co. (1979) 88 Cal.App.3d 823, 830 [152 Cal.Rptr. 98].)
This court has recognized that the "frustration of purpose" doctrine can also afford relief. "If the purpose of requiring employment on a certain date was to induce employees to remain in the employment, it may reasonably be argued that the purpose of the contingency was frustrated by the closing of the plant and the employees should be excused from performance of the condition precedent." (Posner v. Grunwald-Marx, Inc., supra, 56 Cal.2d at p. 189.)
The right to a paid vacation, when offered in an employer's policy or contract of employment, constitutes deferred wages for services rendered. Case law from this state and others, as well as principles of equity and justice, compel the conclusion that a proportionate right to a paid vacation "vests" as the labor is rendered. Once vested, the right is protected from forfeiture by section 227.3. On termination of employment, therefore, the statute requires that an employee be paid in wages for a pro rata share of his vacation pay.
The judgment is affirmed.
Mosk, J., Richardson, J., Newman, J., Kaus, J., Broussard, J., and Reynoso, J., concurred.
Appellant's petition for a rehearing was denied September 22, 1982. Richardson, J., was of the opinion that the petition should be granted.
In 1977, the company's policy was again changed — this time to provide more vacation time. This change was communicated orally to the employees in English and in Spanish and a written notice (in English) summarizing the policy was posted above the time clock and on the employees' bulletin board. This revised policy remained in effect at all times relevant to this appeal.
"1 week — First Year
"2 weeks — Second Year
"3 weeks — Fifth Year
"4 weeks — Twelfth Year
"Eligibility to be on the employee's anniversary date.
"Time off must be taken during the year of eligibility. No pay will be given in lieu of vacation time.
"No carry-over of vacation from one year to the next.
"Vacation must be scheduled and approved by Management four (4) weeks prior to start of vacation.
"Payment will be made at the employee's request, providing the anniversary date has past [sic] and providing advance notice, in writing, (through Department Manager) is given two weeks prior to payment request.
"Payment will be based on forty (40) hours at the current rate of pay.
"No prorating of vacation time."
Unless otherwise indicated, all statutory references are to the Labor Code.
In light of this inconsistency and ambiguity, if this court were asked to interpret this notice, it might conclude that the company was obliged, by the terms of its own policy, to pay Suastez pro rata vacation pay. However, since Suastez does not contest the accuracy of the company's interpretation of the policy, that issue is not before this court.
Affirming an arbitrator's award of vacation benefits to laid-off employees, one court noted, "`It is certain that vacation pay is a right which more often than otherwise survives the expiration of the agreement and "vests" in the employee as he goes about his chores from day to day. Where a plant has been shut down or the employer has gone out of business and the collective bargaining agreement has been terminated, courts, as well as arbitrators, tend to grant vacation on a pro rata basis for the period during which the employees have served notwithstanding the fact that they may not have met the requirement that they be in the employer's employ on a specific date. In some of these cases arbitrators have ... rationalized the result by holding that the employees were merely "laid off" and retained their rights as employees, or have interpreted the eligibility date merely as a "calculation date."' Labor Arbitration and Industrial Change, BNA, 1963, p. 198." (Amalg. Butcher Workmen Loc. Un. No. 641 v. Capitol Pack. Co., supra, 413 F.2d at p. 672, fn. 5.)