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Sabbatical Programs Offered to Employees May Count as Vested Vacation upon Separation

Employers who choose to include sabbaticals as part of their employee benefits must understand the implications of such a benefit upon an employee’s separation with the employer. Most employers know vested vacation must be paid to the employee upon separation, however, they do not realize sabbaticals may also qualify as vested vacation that must be paid to the employee upon separation.

Pursuant to Labor Code sections 201 and 202, an employer must pay an employee all wages earned and unpaid at the time, or soon after, employment terminates. While employers are not required to offer paid vacation, if they do Labor Code Section 227.3 provides that unless otherwise provided by a collective bargaining agreement, when an employee is terminated without having taken his vested vacation time all vested vacation must be paid to the employee as wages at the employee’s final rate. This applies even where vacation is earned prior to the employee’s eligibility to use the vacation time. In the case of Suastez v. Plastic Dress-Up Co. (1982) 31 Cal.3d 774, the Court held that vacation pay constitutes deferred wages for services rendered. A proportionate right to a paid vacation “vests” as the labor is rendered. Once vested, the right is protected from forfeiture by Labor Code section 227.3. On termination of employment therefore, the statute requires that an employee be paid wages for a pro rata share of his vacation pay.

A recent case, Paton v. Advanced Micro Devices, Inc. (2011) ___ Cal. App.4th ___ [2011 WL 3369346], looked at the issue of whether sabbaticals are really just extra vacation, which under Labor Code section 227.3 may not be forfeited upon separation. Plaintiff, Eric Paton, sued his former employer, Advanced Micro Devices, Inc., for failing to pay him for an eight-week sabbatical he had earned but not used by the time he resigned. Under his employer’s sabbatical policy, salaried employees with seven years of service were eligible for an eight-week fully paid sabbatical. The leave was forfeited if the employee did not use it before employment terminated. Plaintiff argued that his right to the sabbatical had vested over the seven years he worked for his employer and he was therefore entitled to be paid for it when he resigned.

The Paton Court explained that true sabbatical leaves are conditioned paid leaves during which the employee is expected to use the time for an identified purpose other than rest and recreation. As such, legitimate sabbatical leaves are not considered vacation or deferred compensation under Labor Code section 227.3. The thornier problem, the Court explained, is where the sabbatical is granted based only upon the length of service and is unconditional with regard to the employee’s use of the time away. Such a program has elements in common with regular vacation. But it could still be a legitimate sabbatical if the facts show the leave is designed as an incentive for continued and improved performance by the most experienced employees and not merely as a reward for a prior period of service.

The Court applied a four-factored test developed by the Department of Labor Standards and Enforcement (“DLSE Test”). The DLSE Test was designed to identify a true sabbatical from sabbaticals offered as subterfuge to avoid having to pay vested vacation time to departing employees.

Under the DLSE Test, a sabbatical program is not considered regular vacation if:  (1) the leave is granted infrequently (every seven years is the traditional frequency); (2) the length of the leave is adequate to achieve the employer’s purpose (the length should be longer than that offered for vacation); (3) the leave is granted in addition to regular vacation; and (4) the leave incorporates some feature that demonstrates that the employee taking the sabbatical is expected to return to work for the employer after the leave is over.

The Court summarized the DLSE Test by saying the “fundamental question is whether the leave is compensation earned over the course of the employment, the enjoyment of which is deferred, or whether the leave is intended to retain the most experienced or valued employees and to enhance their future service to the employer.”

In the Paton case, the Court determined that it did not have enough facts to determine whether the sabbatical was intended as incentive to induce experienced employees to continue working for the employer and increase their productivity or creativity upon return to work, which would not be considered vested vacation, or whether the leave was actually intended as additional vacation for longer term employees, which would constitute vested vacation that must be distributed upon separation.

While the Paton Court did not resolve the issue of whether advanced Micro Devices, Inc.’s sabbatical policy was subject to Labor Code section 227.3, the Paton case does provide significant insight into the factors that will be considered by a court in determining whether an employer’s sabbatical policy will be deemed to cover a true sabbatical or a vested vacation in disguise.

Heather Whitham

hwhitham@carnaclaw.com