California’s Court of Appeals recently held that employers can pay vacation benefits at less than the employee’s normal rate of pay.
In Bell v. H.F. Cox, Inc., Oscar Bell, along with fellow truck drivers, sued H.F. Cox, Inc. for violating California Labor Code section 227.3 – unless otherwise provided by a collective-bargaining agreement, employers must pay terminating employees all vested vacation at the employee’s “final rate in accordance with” the “contract of employment or employment policy respecting eligibility or time served.” Under Cox’s vacation policy, eligible employees earned paid vacation annually. If an employee was terminated, however, that employee would not be entitled to any unused vacation pay. In essence, Cox paid employees vacation benefits at zero, which was less than the employee’s normal rate of pay. Current employees were also paid vacation benefits at less than their normal rate of pay.
The trial court granted summary adjudication to Cox, holding that Cox could lawfully pay current employees vacation pay at a rate less than their normal rate of pay. However, for terminated employees the trial court found Cox’s failure to pay promised vacation benefits and failure to pay vacation benefits due upon termination were preempted by the Employee Retirement Income Security Act (ERISA) (29 U.S.C. § 1001 et seq.). The trial court cited Massachusetts v. Morash, where the U.S. Supreme Court considered whether ERISA preempted an action under state law to enforce a company’s policy of paying its discharged employees for their unused vacation time. The Supreme Court held that a policy of maintaining a separate fund to pay employees vacation benefits constitutes an employee benefit plan governed by ERISA, but a policy of paying vacation benefits from an employer’s general assets does not constitute an employee benefit plan governed by ERISA. Massachusetts v. Morash, 490 U.S. 107 (1989).
Both parties appealed.
The Court of Appeals held that since Cox paid vacation benefits from general assets, Morash applied for current employees and Cox’s vacation policy was legal. For terminating employees, the Court of Appeals held that section 227.3 applied. However, since Cox relied on what it thought was an ERISA-protected employee benefit plan, under which it paid terminating employees no vacation pay at all, the Court of Appeals did not consider whether terminating employees could be paid unused weeks of vacation at a rate lower than their normal rate of pay.
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