California treats accrued unused vacation as earned wages. Once earned, it cannot be forfeited — not by a "use-it-or-lose-it" policy, not by a forfeiture clause at termination, and not by a unilateral reset by the employer. The rule is in Labor Code § 227.3 and the long line of cases interpreting it.
PTO programs that combine vacation and sick leave generally fall under the same rule for the vacation component. Pure sick-leave programs are treated differently: California does not require sick leave payout at termination unless the employer's policy promises it.
The rule, in plain terms
- Vacation is earned wages: Once accrued, vacation is the employee's property and cannot be forfeited.
- No use-it-or-lose-it: Policies that erase accrued vacation at year-end or upon separation are unenforceable.
- Reasonable accrual caps allowed: The employer may cap further accrual once the employee reaches a maximum balance (so accrual pauses until the employee uses some). But the cap cannot retroactively erase already-accrued time.
- Payout at final rate: Vacation is paid out at the employee's final rate of pay, even if it was accrued at a lower rate.
- Sick leave: Required California sick leave (under the Healthy Workplaces, Healthy Families Act) does NOT need to be paid out on separation, unless the employer's policy promises payout. PTO programs that combine sick and vacation must pay out the full balance because the vacation component cannot be parsed out.
- Waiting-time penalty: Failure to include accrued vacation in the final paycheck triggers Labor Code § 203 waiting-time penalties — up to 30 days of pay.
Scripts to use
To enforce vacation payout at termination:
"California Labor Code § 227.3 treats accrued unused vacation as earned wages. My current balance is [N] hours at my final rate of pay of [$X]. Please include this amount — [$X × N] — in my final paycheck per Labor Code §§ 201–203."
When the employer claims a use-it-or-lose-it policy:
"California has long held that use-it-or-lose-it vacation policies are not enforceable as to accrued time (Suastez v. Plastic Dress-Up Co.). My accrued balance of [N] hours is wages owed at termination. Please correct the final paycheck."
For PTO programs that combine vacation and sick leave:
"The PTO program combines vacation and sick-leave components. Because the vacation portion cannot be reliably separated, California requires payout of the full balance. My current PTO balance is [N] hours."
What to document
- Your vacation/PTO accrual rate and any caps in the policy
- Your accrued balance at the most recent pay period and at your last day worked
- Your final rate of pay (not your starting rate)
- The policy in effect at separation, including any changes during your employment
- Whether the program is "pure vacation," "pure sick," or combined PTO
When to escalate
If the employer underpays or refuses to pay accrued vacation:
- File a wage claim with the California Labor Commissioner (DLSE). Online filing, no filing fee. The DLSE will calculate the vacation owed plus any waiting-time penalty.
- For larger claims or systemic issues (entire teams underpaid), consult an employment attorney. California allows recovery of attorney's fees on prevailing wage claims, and class action treatment is common for vacation-payout violations.
- For high-value executive or senior employees with separate written PTO arrangements (sabbatical accrual, paid leave banks), the contract terms may layer additional rights on top of the statutory minimums.
Note: § 227.3 applies to private employers in California. Public-sector employers have separate rules under their own statutes and collective bargaining agreements. If you are a public employee, check the specific MOU or applicable code section.
Educational content only — not legal advice. Employment law varies by jurisdiction and situation. Consult a qualified employment attorney for advice specific to your circumstances.