Layoff with No Return Date Entitles California Employees to Immediate Vacation Pay

Takeaway: This ruling is an example of the impact that enforcement agency interpretations of applicable laws can have when the statutes are silent or ambiguous with regard to a specific issue. Courts offer varying degrees of deference to the enforcement agency’s interpretations depending on circumstances. In this case, the state enforcement agency’s interpretations—in an opinion letter and a policy manual—explicitly supported the employees’ position on one issue, but a federal agency interpretation—in a regulation adopted pursuant to notice and public comment—supported the employer’s position on another issue. 

​Hotel employees were entitled to payment for accrued vacation promptly after they were laid off without a specific return date, not when their employment was formally terminated months later, according to the 9th U.S. Circuit Court of Appeals.

In March 2020, because of the reduction in business caused by the COVID-19 pandemic, the employer temporarily laid off over 7,000 employees. In June 2020, another letter informed employees that their employment would be terminated on June 27, 2020. An employee filed a class-action complaint in Los Angeles County Superior Court asserting claims under California law for, among other things, the employer’s failure to pay all wages upon discharge and waiting time penalties. The employer removed the action to federal court.

The laid-off employees contended that the employer violated California law by failing to pay them immediately for their accrued vacation time and by failing to compensate them for the value of free hotel rooms they received each year. The 9th Circuit reversed the trial court’s grant of summary judgment for the employer, concluding that the prompt payment provisions of the California Labor Code required the employer to pay the employees their accrued vacation pay in March 2020. The appeals court sent the case back to the trial court to consider whether the employer had acted willfully in failing to comply. Under the Fair Labor Standards Act (FLSA), however, the value of complimentary hotel rooms provided to employees was properly excluded from the calculation of the employees’ regular rate of pay. So, the court affirmed the grant of summary judgment as to that claim.

The issue was not whether the employees were entitled to accrued vacation pay, but whether the temporary layoff triggered the prompt payment provision. That is, when did the discharge occur and the accrued vacation pay become due and payable—March 2020 or June 2020?

Section 201(a) of the California Labor Code, which requires the immediate payment of wages earned and unpaid at the time of discharge, was the applicable provision, the court said, not Section 227.3, which establishes the right to—but not the timing of—accrued vacation pay. Section 201, however, does not define “discharge.” So, the question was whether a temporary layoff, with no specified return date, is a discharge for purposes of Section 201.

In the absence of relevant case law, the 9th Circuit relied on interpretations by the California Division of Labor Standards Enforcement (DLSE), which had answered the question explicitly in Opinion Letter 1996.05.30: “If an employee is laid off without a specific return date within the normal pay period, the wages earned to and including the layoff date are due and payable in accordance with Section 201.” The DLSE had adopted the same position in its Policies and Interpretations Manual.

Although the layoff letter said the employees were not terminated and that they would return to work at some unknown time, that was “nothing but an unenforceable promise,” the 9th Circuit stated. Opinion Letter 1996.05.30 and the DLSE manual established that a temporary layoff with no specific return date within the normal pay period is a discharge within the meaning of Section 201, requiring the immediate payment of accrued wages. Accordingly, the 9th Circuit reversed the trial court’s summary judgment ruling as to the prompt payment claim. As to whether waiting time penalties were due, the appeals court directed the trial court to consider whether the employer had a good-faith dispute as to when payment was due.

The employees argued that the value of the free rooms they were entitled to should have been included in the calculation of their regular rate of pay in determining their final wage and overtime payments. California follows the FLSA standard to determine what constitutes an employee’s “regular pay.” The 9th Circuit ruled that the room nights were not excludable as gifts under 29 U.S.C. Section 207(e)(1), but rather were excludable as other similar payments under 29 C.F.R. Section 778.224.

Even though the complimentary hotel rooms are not similar to any of the excludable payments described in the statute, the relevant Department of Labor regulation states that discounts on employer-provided retail goods and services is an example of other similar payments. The 9th Circuit therefore affirmed the trial court’s conclusion that the value of the complimentary hotel rooms was properly excluded from the calculation of the regular rate of pay.

Hartstein v. Hyatt Corp., 9th Cir., No. 22-55276 (Sept. 22, 2023).

Margaret M. Clark, J.D., SHRM-SCP, is a freelance writer in Arlington, Va.

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