California Law Does Not Prohibit Employers From Deducting From Exempt Employees’ Vacation Leave Credits Even For Absences Of Less Than Four Hours

On July 21, 2014, the California Court of Appeal's Fourth Appellate District, Division One, affirmed the trial court's decision in Rhea v. General Atomics (July 21, 2014, D064517 ) —- Cal.App.4th —).  In reaching its decision, the court re-affirmed a previous appellate decision, Conley v. Pacific Gas & Electric Co. (2005) 131 Cal.App.4th 260. 


The facts of this case were undisputed. The plaintiff, Lori Rhea, is employed at General Atomics in a salaried, exempt level position for purposes of overtime pay under federal and California wage and hour laws. At General Atomics, exempt employees accrue annual leave which the employees can utilize to take paid leave off work for any reason, including vacation, sickness, medical appointments and family obligations. At General Atomics, exempt employees are not paid overtime and their salaries do not fluctuate based on the number of hours worked by the employee within the pay period.

General Atomics requires its exempt employees to use accrued leave when the exempt employee is off work for full or partial days. Over the time period relevant to this lawsuit, General Atomics had two policies related to the use of accrued leave. Between January 3, 2009 and February 4, 2011, exempt employees were required to use accrued leave only if the partial day absence was four hours or greater. At all other times, the policy has been to deduct leave for absences of any length. Over the relevant time period, a vast majority of the exempt employees recorded leaves of one hour or greater in length. Whether absent for a full or partial day, the employee continues to receive their full salary and continues to accrue leave during the period of the absence. Further, even if an employee is absent a full or partial day during a particular week, the employee is not required to use leave if the employees works a total of 40 hours or more in that same week. If an exempt employee's employment is terminated and the employee has a deficit leave balance, the employee's final paycheck is not reduced to offset the negative balance.


Federal regulations define what it means to be paid on a salary basis. Subject to certain exceptions, an employee is considered to be paid on a salary basis when the employee receives a predetermined amount of compensation each pay period regardless of the quality or quantity of the work performed. (See 29 C.F.R. § 541.602(a) (2013).) The key exception applicable here is that salary can be reduced for full day absences for personal reasons, sickness or disability." (29 C.F.R § 541.602(b)(1) (2013).)

California does not have corresponding statutes or regulations. However, the general approach in interpreting California law has been to use the federal salary basis test unless there is a more protective standard in California. (Negri v. Koning & Associates (2013) 216 Cal.App.4th 392, 398.)

It is well established and undisputed amongst the parties that under both California and federal law, when an exempt employee is absent from work for a partial day, an employer is prohibited from deducting monetary pay from the employee's salary. (Conley, supra, 160 Cal.App.4th 260.) In this case, Rhea argues that deduction from her leave balance is also prohibited even though her salary is not reduced when her leave accruals are utilized. The court disagreed, citing the previous decision in Conley, supra, at 271. Additionally, the court relied on the California Division of Labor and Standards Enforcement (DLSE) which followed Conley in its November 23, 2009 Opinion Letter.

Rhea argued that the court in Conley and the DLSE wrongly concluded California law allows employers to deduct leave from exempt employees when absent for a partial day. According to Rhea, the court in Conley and the DLSE are in error because neither recognize that California law contains anti-forfeiture provisions that protect vacation pay.

Rhea argued that under California law, vacation leave is treated as "wages" or "deferred compensation." Rhea further argued that California prohibits the forfeiture of earned wages, including vacation pay and therefore, any deduction of leave for a partial day absence was an impermissible forfeiture of wages. The court agreed with Rhea's first two points but found that her argument failed with respect to her conclusion. The court concluded that an employer's policy of requiring an employee to utilize accrued leave for partial day absences does not constitute a "take away" or reclamation of leave benefits. The court cited to the analysis in the Conley decision, finding that all leave time earned has been received even if the employee is required to use leave time when he or she is unable to work. The requirement to use the leave "neither imposes a forfeiture nor operates to prevent vacation pay from vesting as it is earned. All it does is regulate the timing of exempt employees' use of their vacation time, by requiring them to use it when they want or need to be absent from work." (Conley, supra, 160 Cal.App.4th at 270.)

The court further dismissed Rhea's argument that General Atomic's policy of deducting leave for partial day absences constituted impermissible wage shifting. Rhea argued that by using accrued leave earned in previous pay periods to pay employees for partial day absences in the present pay period, General Atomic was violating the principles held in Armenta v. Osmose (2005) 135 Cal.App.4th 314. The court found Rhea's second argument failed as well because Rhea failed to prove that General Atomic failed to pay all of the wages it was obligated to pay during an employee's partial day absence, thus finding there was no shortfall wages in wages that needed to be made up in the first instance.

Lastly, the court rejected Rhea's argument that even if the court did find that partial day absences could be deducted, they had to be absences of four or more. The court found no basis in law for the distinction and concluded that regardless of whether the absence is at least four hours or for a shorter duration, requiring exempt employees to utilize accrued leave for partial day absences is not a violation of law.


If you have any questions concerning this Legal Alert, please contact the following from our office, or the attorney with whom you normally consult.

Bruce A. Scheidt, Laura Izon Powell, David W. Tyra or Kristianne T. Seargeant | 916.321.4500