Labor Code §227.3 – Vacation Payout at Termination

California Labor Code §227.3 requires an employer that offers paid vacation to pay out all vested, unused vacation as wages, at the employee’s final rate of pay, when employment ends, and it bars any policy that makes earned vacation disappear at termination. It applies whether you quit, are fired or are laid off.

The payout can be substantial. An employee earning $28 an hour with 100 hours of unused vacation is owed $2,800, and if that money is willfully withheld from the final paycheck, the employer can also owe a waiting time penalty of up to 30 days of wages under Labor Code §203.

This explainer focuses on the statute itself: what §227.3 says, who it covers, what employers can and cannot do, a worked example, and how to recover unpaid vacation. For a practical guide to “use it or lose it” policies, see our article on vacation payout and use-it-or-lose-it rules.

What Labor Code §227.3 says

Section 227.3 is a single paragraph with four working parts:

1. When it applies. It applies “whenever a contract of employment or employer policy provides for paid vacations,” unless a collective bargaining agreement provides otherwise.
2. The payout rule. If an employee is terminated “without having taken off his vested vacation time, all vested vacation shall be paid to him as wages at his final rate,” in line with the contract or policy’s rules on eligibility or time served.
3. The anti-forfeiture rule. An employment contract or employer policy “shall not provide for forfeiture of vested vacation time upon termination.”
4. How disputes are resolved. In resolving vacation disputes, the Labor Commissioner “shall apply the principles of equity and fairness.”

“Terminated” here means any end to employment. The Labor Commissioner’s Office states that unused vacation must be paid “whenever the employment relationship ends, for any reason whatsoever,” and that because vacation is wages, it belongs in the final paycheck.

Key fact

Key ideas behind the statute: vesting and “final rate”

Vacation vests as you work. The Labor Commissioner’s Office explains that, under California law, earned vacation is a form of wages that is earned, or “vests,” as labor is performed. If you are entitled to 10 days a year, after six months you have earned five days. Those days are yours, even if the policy calls them next year’s vacation.

Payout is at the final rate. The statute requires payment at your “final rate,” not the lower rate you earned when the vacation accrued. If you got a raise shortly before leaving, all of your unused vacation is paid at the new rate.

PTO counts. According to the Labor Commissioner’s Office, a “paid time off” plan that combines vacation and sick days into one bank usable for any purpose is treated like vacation, so unused PTO must also be paid out. Stand-alone paid sick leave is different: under Labor Code §246(g), it generally does not have to be paid out at separation.

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Who §227.3 covers, and what employers can still do

California law does not require employers to offer vacation at all. The Labor Commissioner’s Office confirms there is no legal requirement to provide paid or unpaid vacation. Section 227.3 applies only once an employer has a policy, practice or agreement to provide paid vacation.

Within that framework, the Labor Commissioner’s Office recognizes that employers may:

• Cap accruals. A policy can stop further accrual once a balance reaches a set ceiling, such as 200 hours. That is different from taking away vacation already earned.
• Exclude some employee classes. A plan can exclude groups such as part-time, temporary or probationary employees, if the plan says so clearly.
• Use a waiting period. A plan can provide that no vacation is earned during an initial period, as long as it is genuine and not a disguise for vacation actually being earned.
• Control scheduling. Employers can decide when vacation is taken and how much can be taken at once.
• Cash out unused vacation each year. Paying employees for unused vacation at year end is allowed.

What employers cannot do:

• “Use it or lose it.” The Labor Commissioner’s Office calls a policy that forfeits unused vacation by a set date illegal under California law.
• Forfeit vacation at termination. Section 227.3 expressly prohibits it, whatever the reason employment ended.
• Deduct “advanced” vacation from the final paycheck. According to the Labor Commissioner’s Office, if you took vacation before you earned it and then leave, the employer generally cannot take that unearned amount out of your final wages.

The main statutory exception is a collective bargaining agreement that provides otherwise.

Worked example: calculating a vacation payout

💡 Example (hypothetical): Rosa’s employer gives 80 hours of vacation a year, earned evenly throughout the year. Last December, under a “use it or lose it” policy, her employer wiped out 40 hours she had not used. This year she works 9 months and uses no vacation, so she earns 80 × 9 ÷ 12 = 60 hours. Three months ago her pay went from $25 to $28 an hour.

Under §227.3, the 40 “forfeited” hours were vested and cannot be taken away, so she is owed 40 + 60 = 100 hours. At her final rate of $28, her payout is 100 × $28 = $2,800. If the employer pays only the 60 current-year hours at her old $25 rate ($1,500), it has shorted her $1,300.

If that shortfall was willful and not the subject of a good-faith dispute, Rosa could also claim a waiting time penalty under Labor Code §203. At 8 hours a day and $28 an hour, her daily rate is $224, so the maximum 30-day penalty would be 30 × $224 = $6,720. Our wage and hour calculator can help you estimate your own numbers.

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Remedies when vacation is not paid out

Because vested vacation is wages, unpaid vacation is treated like any other unpaid final wages:

• The vacation pay itself, at the final rate.
• Waiting time penalties of up to 30 days of wages if the failure to pay was willful (Labor Code §203). The Labor Commissioner’s Office confirms that a former employee owed vacation can claim this penalty.
• Interest on the unpaid amount (Labor Code §218.6).
• Attorney’s fees and costs in many court actions for nonpayment of wages (Labor Code §218.5).

Unpaid vacation often shows up next to other final-pay problems. Our explainer on final paycheck rules and waiting time penalties covers the timing rules for the whole final paycheck.

By the numbers30 days

Deadlines and where to file

Claims for unpaid wages created by the Labor Code are generally subject to a three-year statute of limitations under Code of Civil Procedure §338(a), and Labor Code §203(b) ties the deadline for the waiting time penalty to the deadline for the underlying wages. Because §227.3 makes vested vacation payable when employment ends, the timing of a payout claim is usually measured from your last day of work, but the exact deadline can depend on your policy and the type of claim. Do not wait.

The Labor Commissioner’s Office says you can recover unpaid vacation in two main ways:

1. A wage claim with the Labor Commissioner’s Office, which will apply the “equity and fairness” standard in §227.3.
2. A lawsuit in court, often together with related wage and hour claims.

Bring your vacation policy or handbook, your last pay stubs showing accrued balances, and your final paycheck. Our article on requesting your personnel file and payroll records explains how to get records your employer holds. For help choosing a forum, see Labor Commissioner wage claim vs. hiring a lawyer.

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Related Labor Code sections

• §§201 and 202: when final wages, including vacation, must be paid after a discharge or a quit.
• §203: the waiting time penalty for willfully late final wages.
• §246(g): accrued paid sick leave generally does not have to be paid out at separation.
• §226: wage statement requirements. See our guide to California pay stub requirements.

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Frequently asked questions

Does my employer have to pay out my vacation if I quit?

Yes. Section 227.3 applies whenever employment ends, for any reason. If your employer provides paid vacation, all vested, unused vacation must be paid at your final rate of pay with your final wages.

Is “use it or lose it” legal in California?

No. The Labor Commissioner’s Office treats vacation as wages that vest as they are earned, and considers a policy that forfeits unused vacation by a set date illegal. A cap that stops future accrual is allowed.

Do I get paid out for sick leave too?

Generally not. Labor Code §246(g) does not require payout of accrued paid sick leave at separation. But if your employer uses a single PTO bank for vacation and sick time, unused PTO is treated like vacation and must be paid out.

What rate should my vacation payout be?

Your final rate of pay. Section 227.3 says vested vacation is paid “at his final rate,” so a recent raise applies to your whole balance.

Can a union contract change these rules?

Yes. Section 227.3 applies “unless otherwise provided by a collective-bargaining agreement,” so a union contract can set different vacation payout terms.

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