All California employers should know by now that if they have a paid vacation policy, the vacation benefits constitute a form of “wages” under California law. (See Murphy v. Kenneth Cole Productions, Inc. (2007) 40 Cal.4th 1094, 1103; Suastez v. Plastic Dress-Up Co. (1982) 31 Cal.3d 774, 784.)  California employers are also likely readily familiar with the requirements of Labor Code section 226(a), which require employees’ wage statements to contain certain information, including gross wages earned.

But absent a vacation pay-out upon the termination of the employment relationship, are employers required to include the monetary value of accrued vacation time in employees’ wage statements under Section 226(a)? The answer is no, as held by the Court of Appeal on October 20, 2016 in Soto v. Motel 6 Operating, L.P.

In so holding, the Court of Appeal found that neither the statutory language of section 226 nor its statutory purpose supported the position that employers are required to list the monetary amount of earned vacation pay on each itemized wage statement.

The court first noted that despite the fact that section 226(a) was highly detailed and contained nine separate categories of information that must be included on wage statements, the section did not identify accrued paid vacation as one of these categories. It rejected the argument that an accrued vacation benefit fell within the definition of “gross wages earned” and “net wages earned” categorized in section 226(a), because courts recognized that although vested vacation time vested as labor was provided, unused vacation time did not become a quantifiable vacation wage until the employee separated from employment.  (Church v. Jamison (2006) 143 Cal.App.4th 1568, 1576-1577.)

The court also found support for this principle in the language of Labor Code section 227.3, which required all vested vacation to be paid to the employee “as wages” at his final rate upon termination, which lead to the reasonable inference that prior to termination, accrued vacation pay was not a “wage.” The court further observed that before separation, the amount of vacation pay to which the employee might be entitled was not ascertainable, since the amount of unused vacation and an employee’s final rate may change.

Additionally, the court looked at the provisions of section 226(a) as a whole, instead of focusing solely on the statutory term “wages.” These provisions stated that at the time of each payment of wages, the employer must furnish an accurate itemized statement of these earned wages.  Since unused vacation pay was not paid to the employee until the termination of the relationship, and the monetary value of the unused vacation pay could not be determined until the termination date, the court found it illogical to extend the requirement that an employer identify earned “wages” to accrued vacation benefits.

Finally, the court reviewed the statutory purpose of section 226(a), which was to document the paid wages to ensure the employee was fully informed regarding the payment of those wages.  Requiring the employer to identify items that were not part of the employee’s current monetary compensation did not further this legislative purpose.