Daily Credit for Vacation Pay Backed by Justices

In a decision that could mean up to a billion dollars a year for California workers who leave their jobs, the Supreme Court on Monday let stand an appeal court ruling that said employees earn their vacation benefits on a daily basis.

By rejecting an appeal from six California employer groups, the justices appear to have ended a four-year legal battle in state and federal courts over vacation pay.

For businesses with a high turnover rate, Monday’s outcome will be especially costly, because it means that they will now be forced to pay their workers a lump-sum benefit when they quit.

Many firms offer vacation plans specifying that workers can take time off only after a certain period of service, usually one year. Under most existing policies, they would get no vacation or payment if they quit or lost their jobs before that time.

Pro-Rata Basis

In July, 1982, however, the California Supreme Court interpreted state labor law to require that vacation benefits be paid on a pro-rata basis.

Angered by that ruling, a coalition of California employers--ranging from manufacturing firms to hospitals, restaurants and hotels--went to federal court, arguing that a less demanding federal law superseded the more liberal state statute.

In 1983, a federal district judge in Los Angeles ruled that the “plain language” of the federal Employee Retirement Income Security Act of 1974 lists “vacation benefits” as an “employee welfare benefit” and said this law “shall supersede any and all state laws.” In addition, Judge Richard A. Gadbois Jr. stopped the state labor commissioner from hearing any appeals concerning vacation benefits.

The employers’ victory was short-lived, however. In 1985, the U.S. 9th Circuit Court of Appeals reversed the district court ruling, saying vacation benefits are like wages, which are regulated by the state, and not the same as pension plans that fall under the federal law.

The employers urged the high court to overturn the decision, noting among other things that it conflicts with other appeals court rulings. On Monday, however, the justices turned down that appeal (California Hospital Assn. vs. Henning, 85-1648).

“It’s a very unfortunate decision from the employers’ perspective,” said Richard J. Simmons, a Los Angeles attorney who represented the six California business groups. “This affects every employer in California who has a vacation plan, and that covers millions of employees.”

He estimated that “a conservative figure” for the added cost to California business will be about $1 billion a year. Businesses could simply opt to eliminate vacation benefits, Simmons said, “but frankly, only smaller employers will consider that.”

California Labor Commissioner Lloyd Aubry Jr. said Monday’s decision was a good one for workers.

Two Weeks

“This means that employees are entitled to all the vacation pay they have earned,” Aubry said. “If an employee earns two weeks of vacation a year and he leaves after six months, he is entitled to pay for a week.”

The high court’s rejection of the appeal also appears to mean that the state labor commissioner can again hear claims concerning vacation pay.

“For the last three years, we haven’t been able to hear those cases. I think this means we can resume hearing those,” Aubry said.

Meanwhile, in related cases, rulings by the high court Monday appeared to be heading in the other direction. The justices upheld lower-court rulings from New York and North Carolina that said employees are not entitled to “severance pay” under state law, because that is a welfare benefit covered by the federal statute.