In a partially published opinion, the First District Court of Appeal for the State of California has ruled that deductions from a salaried employee's vacation bank for partial day absences does not render the employee non-exempt from overtime pay. In Conley v. Pacific Gas and Electric Company, the court addressed this issue of first impression by holding that "nothing in California law precludes an employer from following the established federal policy permitting employers to deduct from exempt employees’ vacation leave, when available, on account of partial-day absences from work." This ruling is contrary to a long-held DLSE position, just recently reversed, that asserted that salaried employees could not be docked pay or benefits for any partial day absences. Curiously, that part of the opinion would likely not have been part of the court's analysis but for both parties expressly asking the court to ruling on the issue as a matter of "pure law."
The case involves a class action brought on behalf of a number of PG&E employees who dispute PG&E’s classification of them as exempt. One subclass of claimants included "all PG&E employees who have been classified as exempt," but who were docked vacation time for partial day absences, while other, smaller subclasses were asserted on behalf of workers who were allegedly misclassified under a job duties test.
The trial court denied the plaintiffs' motion for class certification in its entirety, ruling that, with respect to PG&E’s policy of charging its exempt employees’ vacation leave banks for partial-day absences from work, the class members did not share a "plausible cause of action," and accordingly certification of the proposed class would be inappropriate. The trial court ruled that there was “an overriding common factual and legal question presented"as to the salary basis class, but denied certification based upon the rule in American Suzuki Motor Corp. v. Superior Court (1995) 37 Cal.App.4th 129, that “[f]or a class to be considered ascertainable, its members must have a plausible cause of action against the defendant." The plaintiffs argued that American Suzuki was disapproved by the Supreme Court in Linder v. Thrifty Oil Co. (2000) 23 Cal.4th 429, 442-443 (Linder). And they were absolutely right, and the court agreed. "[T]he holding in American Suzuki on which the trial court relied has been placed in serious question, if not overruled, by Linder’s holding that class certification generally should not be “conditioned upon a showing that class claims for relief are likely to prevail.” (Linder, supra, 23 Cal.4th at p. 443.)
However, the plaintiffs asked the appellate court to address the merits of the claim they have asserted on behalf of the proposed salary basis class. Therefore, the court addressed the merits of the claim both because the parties asked for such review, and because the issue raised is one of continuing importance in wage and hour litigation in California. The court noted: "We are also influenced by the Linder court’s observation that there is nothing to prevent a court from considering the legal sufficiency of claims when ruling on certification where both sides jointly request such action."
The court's analysis was as follows:
Accordingly, we turn to the question whether appellants have a viable legal theory to support the claims of their proposed salary basis class. Appellants’ argument on that point relies primarily on a 1982 decision by the California Supreme Court, Suastez v. Plastic Dress-Up Co. (1982) 31 Cal.3d 774 (Suastez). Because Suastez is so central to appellants’ position, we will describe its rationale and holding in some detail.
Suastez, supra, 31 Cal.3d 774, involved the interpretation of Labor Code section 227.3 (section 227.3), which provides that “whenever a contract of employment or employer policy provides for paid vacations, and an employee is terminated without having taken off his vested vacation time, all vested vacation shall be paid to him as wages . . .” and that “an employment contract or employer policy shall not provide for forfeiture of vested vacation time upon termination.” The opinion in Suastez expressly noted that “[t]he only issue raised by this appeal is when vacation time becomes ‘vested’ under section 227.3.” (Id. at p. 778.) The employer in Suastez, Plastic Dress-Up, had declined to pay any vacation pay to an employee who was terminated prior to the anniversary date of his employment. Plastic Dress-Up contended that this action did not violate section 227.3 because under its vacation policy, its employees’ right to vacation pay did not vest until the end of the year in which the vacation was accrued, or in other words, that completing a year of service was a condition precedent to the vesting of the right to vacation pay. (Suastez, supra, 31 Cal.3d at pp. 778, 781-782.)
In rejecting this argument, our Supreme Court began with the principle that “vacation pay is not a gratuity or a gift, but is, in effect, additional wages for services performed. [Citations.]” (Suastez, supra, 31 Cal.3d at p. 779.) Analogizing vacation pay to pension benefits, the court held that “[t]he right to some share of vacation pay vests, like pension rights, on acceptance of employment. Nonperformance of a condition subsequent, such as Plastic Dress-Up’s requirement that employees remain until their anniversary, can, at most, result in a forfeiture of the right to a vacation; it cannot prevent that right from vesting.” (Id. at p. 781.)
The court went on to hold, however, that a forfeiture of the right to vacation upon an employee’s termination was barred by the clear mandate of section 227.3. (Id. at pp. 781-782.) As already noted, PG&E concedes that compliance with the federal salary basis test requires PG&E to allow exempt employees who have exhausted their vacation leave to take partial-day absences without a corresponding loss in pay.
But appellants argue by extension that employers who require their employees who have not exhausted their vacation leave to apply that leave to partial-day absences violates the employees’ vested right to vacation pay under Suastez. This argument reads the holding of Suastez far too broadly.
Even if we construe Suastez to require pro rata vesting and preclude forfeitures of earned vacation pay under circumstances other than termination, we still would not accept appellants’ contention that PG&E’s vacation leave policy violates the principle announced in that case. Although the federal salary basis test may require PG&E to give exempt employees additional time off for partial-day absences after they exhaust their vacation leave banks, under PG&E’s vacation leave policy, PG&E’s exempt employees do in fact receive all of the paid time off they have earned—they must simply use that accrued vacation time to make up for partial-day absences. In other words, because the deductions made from vacation leave banks of exempt employees represent days on which those employees have, in fact, taken at least four hours off work, PG&E’s vacation leave policy neither imposes a forfeiture nor operates to prevent vacation pay from vesting as it is earned. All it does do is regulate the timing of exempt employees’ use of their vacation time, by requiring them to use it when they want or need to be absent from work for four or more hours in a single day. This is entirely consistent with Suastez, in which the Supreme Court expressly noted that “[s]ection 227.3 . . . does not purport to limit an employer’s right to control the scheduling of its employees’ vacations. [Citations.]” (Id. at pp. 778-779, fn. 7, italics added.) Clearly, therefore, Suastez does not preclude PG&E from requiring its exempt employees to use their vacation leave, if available, when they want or need to take a partial-day absence.
The court also added a brief discussion about the weight of DLSE opinion letters, and, in a footnote, distinguished between absences of four or more hours and those of less than four hours. In the unpublished portion of the opinion, the court addressed developments in case law since the trial court ruling (most notably, Sav-On Drugstores, Inc. v. Superior Court (2004) 34 Cal.4th 319) and remanded the case so that the trial court could reevaluate the certification issues pertaining to the job duties classes in light of those recent developments in case law.
In a nutshell, this opinion, if it remains unreviewed and is not depublished, stands for the proposition that salaried employees in California who have accrued, unused vacation time on the books, can have that vacation time docked if they work less than four hours on any particular workday; and such docking of vacation time does not render them non-exempt and eligible to overtime compensation, in and of itself.