California Appellate Court Answers The Question 'What Is Vacation?'

During these last few weeks of summer, California's Sixth District Court of Appeal has issued a decision opining on the meaning of "vacation." The decision is important because it provides guidance to California employers regarding the circumstances under which unused Paid Time Off (PTO) benefits must be paid out upon termination.

In Paton v. Advanced Micro Devices, Inc., No. H034618 (Aug. 5, 2011), the plaintiff became eligible for, but never took, an eight week paid sabbatical. According to the employer's sabbatical program, the paid leave would be forfeited if it was not used while the employee remained employed with the company. When the plaintiff resigned and did not receive any pay-out for his unused sabbatical, he brought a class action lawsuit claiming that the sabbatical was the legal equivalent of extra vacation for long-term employees. As a result, plaintiff argued, an eligible employee who did not use the eight (8) weeks of paid time off should be paid for any unused portion upon termination, just as he would be paid for accrued and unused vacation.

The appellate court reversed summary judgment in favor of the employer, finding that the question of whether the employer's particular sabbatical program granted a legitimate sabbatical (which does not have to be paid out upon termination), or was a subterfuge for additional vacation time, could not be answered based upon the facts before it. In reaching its decision, the court set out a four-part test for determining whether paid time off qualifies as a sabbatical and, by extension, when paid time off must be treated as vacation.

Factual Background

Advanced Micro Devices established its sabbatical program in 1986. Under the original program, all full-time salaried employees in good standing were eligible for an eight-week paid sabbatical after seven years of service. The sabbatical had to be taken within two years of eligibility, and employees whose employment terminated before they took the sabbatical forfeited it. The express purpose of the sabbatical program was to "encourage continued employment with [the company] by providing time away from work for enrichment and revitalization." It was conceived as a way to retain talent in the competitive world of Silicon Valley chip designers, whose employees frequently were recruited by the competition. The program was revised several times, and ultimately discontinued in 2009.

At all pertinent times, the company also maintained a separate...