July 24, 2005 A Partial Day Vacation Deduction For An Exempt Employee Does Not Violate California Law


Last week, in a positive ruling for California employers on an important wage and hour issue, the Court of Appeal ruled that California law does not preclude employers from making deductions from exempt employees' vacation leave on account of partial-day absences. This ruling is contrary to the enforcement position taken by the California Labor Commissioner, and if it becomes final, will support a favorable change in employers' vacation policies.


In Conley v. Pacific Gas and Electric Company, several employees brought a class action against PG&E asserting, among other things, that it improperly treated its employees as exempt from California laws requiring overtime pay. More specifically, the employees claimed that PG&E’s express policy of deducting exempt employees' vacation banks for partial-day absences — defined as absences of four or more hours in a single work day — violated California’s overtime laws and rendered all impacted employees non-exempt and, therefore, entitled to overtime pay. The trial court ruled that PG&E's policy did not violate California law relating to exempt status, and the employees appealed.

As a general rule under both federal and California law, employers cannot deduct from an exempt employees’ wages for partial-day absences because doing so will render the employee non-exempt and entitled to overtime pay. Under established federal law, partial-day deductions from paid vacation leave will not affect an employee’s exempt status because leave time is considered a benefit, not wages. California law on this issue, however, has not been as clear, because California courts have long considered vacation pay as not just a benefit, but vested wages. Moreover, California’s Division of Labor Standards Enforcement (DLSE), the agency responsible for enforcing California’s overtime laws, has opined that accrued vacation deductions violate California law because California treats accrued vacation as accrued wages that are not subject to forfeiture.

With this background in mind, the Court of Appeal found nothing in California law precluding employers from following the federal rule permitting them to require the use of vacation leave for partial-day absences without causing employees to lose their exempt status. In reaching this conclusion, the Court explained that employers have the right to control the scheduling of employee vacations and, therefore, should not be prevented from requiring the use of vacation leave for partial-day absences. Under PG&E's policy, exempt employees receive all of their earned paid time off — the policy simply requires them to use that accrued vacation time to make up for partial-day absences. Further, because the deductions represent days on which employees have, in fact, taken at least four hours off work, PG&E’s policy neither imposes a forfeiture nor operates to prevent vacation pay from vesting as it is earned. All it does is regulate the timing of an exempt employee’s use of vacation time.

What this Means

This decision provides some much-needed guidance and clarification to employers attempting to navigate the murky waters of California’s wage and hour laws. Fearful of the type of claim brought against PG&E, most California employers have avoided reducing accrued vacation time for partial-day absences of exempt employees. If the Conley decision is not reviewed by the California Supreme Court, employers will be able to safely maintain vacation leave policies that provide for the deduction of accrued leave to account for partial-day absences. This ruling is good news for employers, but its limitations should be recognized. First, the policy the Court upheld only applied to partial-day absences of four or more hours. Thus, this ruling’s application to partial-day absences of less than four hours remains uncertain for now. Second, this ruling addresses deductions from accrued vacation leave only and provides no guidance on the handling of partial-day absences for exempt employees who do not have any accrued vacation time. As always, we recommend that employers examine their vacation leave policies to ensure that they comply with the law.

This E-Update was authored by Mike Minguet. For more information, please contact Mr. Minguet or any Paul, Plevin attorney at 619-237-5200.




This will be an interactive workshop that will focus on how recent developments will impact your company’s day-to-day employment practices and what you need to do in 2006 to stay current with the changing employment laws.

We will examine the impact of new laws and court decisions and how these impact the workplace. We will review the changes you should make to practices and documents and will provide concrete suggestions for improving your policies in the coming year.

As always, we will also give you the floor to ask questions of our employment law experts.