Vacation Payout in California: “Use It or Lose It” Is Illegal

In California, earned vacation is wages: your employer cannot take it away under a “use it or lose it” policy, and when your job ends, all of your vested, unused vacation must be paid to you at your final rate of pay. That rule comes from Labor Code 227.3, and it applies whether you quit, are fired or are laid off.

Vacation balances are often worth more than workers realize. A worker earning $30 an hour with 72 hours of unused vacation is owed $2,160 when they leave. If the employer leaves it out of the final paycheck, waiting-time penalties can add up to 30 days of wages on top, $7,200 for someone who works eight-hour days at that rate.

This guide explains how vacation vests, why forfeiture is illegal, what caps and waiting periods are allowed, how PTO and unlimited PTO are treated, how payout is calculated, what you can recover, and what to do if your vacation pay is missing.

The rule: vacation vests as you earn it

California law does not require employers to offer paid vacation. But once an employer does, Labor Code 227.3 controls what happens to it. In Suastez v. Plastic Dress-Up Co. (1982), the California Supreme Court held that paid vacation is a form of deferred wages that vests as the work is performed. If you earn two weeks of vacation over a year, you earn a proportional share of it each day you work.

Two consequences follow:

• Vested vacation can’t be forfeited. Labor Code 227.3 says an employment contract or policy cannot provide for forfeiture of vested vacation time when employment ends, and the courts have applied the same principle during employment.
• Unused vacation must be paid out at the end of employment, as wages, at your final rate of pay.

The rule applies to vacation however it is labeled, including “personal days” or floating holidays that work like vacation. It does not apply to employees covered by a collective bargaining agreement that provides otherwise.

Key fact

Why “use it or lose it” is illegal

A “use it or lose it” policy wipes out unused vacation at the end of the year or some other deadline. Because vacation is wages you have already earned, wiping it out is like taking back part of your paycheck. California courts and the Labor Commissioner have consistently treated these policies as unlawful.

The forfeited hours don’t disappear. They generally remain owed, and must be paid when your employment ends, if not before. If your employer zeroed out your balance at the end of a year, keep a record of what it was.

💡 Example: Priya earns $25 an hour. On December 31, her employer erased the 40 unused vacation hours she had earned that year under a “use it or lose it” policy. Those 40 hours are still owed: 40 × $25 = $1,000. When she later leaves the job with another 32 hours on the books and her rate has risen to $27, she is owed all 72 hours at her final rate: 72 × $27 = $1,944.

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What employers can do: caps, waiting periods and scheduling

California law gives employers some flexibility. They generally may:

• Cap accrual. A policy can set a reasonable maximum balance, after which you stop earning more vacation until you use some. That is different from forfeiture: you keep everything you earned, but you don’t earn more while at the cap.
• Use a waiting period. An employer can provide that new employees do not earn vacation during an initial period, as long as no vacation is actually being earned during that time.
• Control scheduling. An employer can generally decide when vacation may be taken, with reasonable notice, including requiring employees to use vacation during a planned shutdown.
• Decline to cash out during employment. The law requires payout when employment ends, not on request while you are still employed, unless the policy says otherwise.

What an employer cannot do is erase earned hours, reduce your balance as a penalty, pay out at an old lower rate, or condition payout on giving notice or signing a release.

PTO, sick leave and unlimited PTO

Type of leave	Paid out when you leave?	Why
Vacation	Yes, all vested, unused hours	Labor Code 227.3; Suastez
Combined PTO (vacation and sick together)	Yes, the full balance	Treated as vacation
Floating holidays that work like vacation	Generally yes	Treated as vacation
Separate paid sick leave	Generally no	Labor Code 246(g)
Unlimited PTO	Depends on how the policy works in practice	McPherson v. EF Intercultural Foundation

If your employer offers separate paid sick leave, that leave generally does not have to be paid out. Our guide to California paid sick leave explains those rules. But when vacation and sick time are combined into one PTO bank, the whole balance is generally treated as vacation.

Unlimited PTO is a developing area. In McPherson v. EF Intercultural Foundation, Inc. (2020), a California Court of Appeal suggested that a truly unlimited policy might not create vested vacation that must be paid out, but only if it meets strict conditions, such as being clearly written, actually allowing employees to take time off without hidden limits, and not functioning as disguised compensation. The employer in that case did not meet those conditions and owed payout. If your “unlimited” policy had practical limits or approval rules that kept people from using it, you may be owed money.

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How vacation payout is calculated

Your vacation must be paid at your final rate of pay, not the rate you earned when the hours accrued. If you received a raise last month, all of your banked vacation is paid at the new rate. Hourly workers multiply unused hours by their final hourly rate; salaried workers convert their final salary to a daily or hourly rate. For example, a salary of $78,000 a year works out to $1,500 a week, or $300 a day for a five-day week, so 10 unused vacation days are worth $3,000.

If your pay varied from week to week, or included regular shift differentials or other add-ons, ask your employer to explain how it calculated the payout and compare its number to your pay stubs. Errors in the rate are common and easy to miss.

Vacation payout is due with your final wages: on your last day if you are fired or laid off, on your last day if you quit with at least 72 hours’ notice, and within 72 hours if you quit without notice (Labor Code 201 and 202). Our guide to the final paycheck law covers those deadlines in detail.

If the vacation pay is late or missing and the failure is willful, the employer owes a waiting-time penalty of one day’s wages for each day it is late, up to 30 days (Labor Code 203). A good-faith legal dispute can be a defense, but simply forgetting or relying on an illegal forfeiture policy usually is not.

By the numbers30 days

Deadlines and what you can recover

You can recover the unpaid vacation, waiting-time penalties, interest, and in many cases attorney’s fees (Labor Code 218.5). Claims for unpaid wages generally must be filed within three years (Code of Civil Procedure 338), or up to four years under the Unfair Competition Law (Business and Professions Code 17208).

For vacation, courts have generally treated the claim as arising when employment ends, because that is when payout is due. That means vacation earned many years earlier can be included, as long as you act within the limitations period after you leave. Because vacation policies apply to everyone, forfeiture problems are often pursued as class actions or under PAGA.

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What to do if your vacation pay is missing

1. Find your balance. Screenshot your vacation or PTO balance from your pay stub or HR portal, ideally before your last day.
2. Save the written policy and any notice of a cap, forfeiture or year-end “reset.”
3. Compare your final paycheck to your balance and your final rate of pay.
4. Request your payroll records and personnel file in writing (Labor Code 226 and 1198.5).
5. Don’t sign a release in exchange for vacation pay you are already owed. Have any severance agreement reviewed first.
6. Choose how to pursue it. A Labor Commissioner claim or a lawsuit can both work; see our related guide comparing wage claims with hiring a lawyer.

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Vacation problems are often the tip of the iceberg

An employer that ignores vacation rules often makes other final-pay mistakes, such as leaving out commissions, bonuses or meal and rest premiums, or paying late. Salaried employees who lose vacation are sometimes also misclassified as exempt and owed overtime. A vacation claim can be the starting point for a much larger recovery.

Forfeiture policies also tend to affect every employee who has ever left the company, which makes them well suited to a class action or PAGA claim. If your coworkers lost vacation the same way you did, your claim may be part of something larger. Our wage and hour attorneys can review the policy and your final pay together and tell you what the full claim may be worth.

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Frequently asked questions

Does California require employers to give paid vacation?

No. But if an employer offers vacation, it must follow Labor Code 227.3, including payout at the end of employment and no forfeiture.

Can my employer cap how much vacation I accrue?

Yes, a reasonable cap that stops further accrual is generally allowed. Taking away hours you already earned is not.

Do I lose my vacation pay if I quit without notice?

No. You are still owed all vested vacation. Without 72 hours’ notice, your final pay, including vacation, is due within 72 hours.

Can my employer pay out vacation at my old rate?

No. Vacation is paid at your final rate of pay.

My company has unlimited PTO. Am I owed anything when I leave?

Possibly. If the policy was not truly unlimited in practice, or functioned as compensation, payout may be owed. This depends on the details, so it is worth having an attorney review the policy.

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