California law provides that accrued vacation time or PTO belongs to the employee. Employees may either use their vacation time or cash out the value of those hours. When an employee quits or is fired or laid off, all accrued, unused vacation time must be included in the employee's final paycheck.
According to California law, PTO and vacation are wages that have been earned by, but not yet paid to, the employee. Once you earn the vacation or PTO, it cannot be taken away. This means "use it or lose it" policies are illegal in California.
The catch is that employers aren't legally obligated to offer vacation or PTO in the first place. If they do, however, then they must comply with the law.
In the case of Suastez v. Plastic Dress-Up Co., 31 Cal.3d 774, 782 (1982), the employer’s policy declared that one week of PTO/vacation was accrued after one year of employment. The California Supreme Court held that the PTO/vacation time did not "vest" after one year, but instead "vests" on a pro-rata basis as it is earned. In other words an employee would have earned half a week of vacation after working for six months.
However, an employer can have a policy that prevents more vacation pay from accruing for a certain period of time. The employer can set a policy that the employee can only accrue two weeks of vacation, for example. Once the employee hits the cap, the employee will not accrue any new vacation until the employee takes uses some vacation time. Because this is not a "use it or lose it" policy it’s perfectly legal. In other words, an employer is allowed to stop employees from accruing more vacation, but cannot take away what you have already earned.
It is illegal for an employer to require employees to use all or any amount of their vacation within the year or lose it. However, it is within the employer’s right to pay out the unused time at the end of the year.
A policy in which the employee loses vacation time if employment is terminated by either party, for any reason is illegal. All unused vacation time must be paid out upon termination. Because vacation time is considered a wage, waiting time penalties will apply should the employer fail to pay the employee immediately upon being fired or laid off or within 72 hours upon quitting. (These are the time limits that apply to employees' final paychecks.)
Sick pay and fixed holidays are not considered vacation time and are therefore not subject to these rules. San Francisco is an exception to the sick pay rule: If you work in the city of San Francisco, you are entitled to payment of sick time.
An employer is permitted to have a policy of allowing the employee only five sick days a year that do not carry over, for example. If you have unused sick leave at the end of the year, the employer can zero it out without paying you for it. Such a policy applied to vacation days would be illegal.
If the employer lumps both sick and vacation together into "PTO" or some other type of general leave plan, then all the time will be treated like vacation time. It must roll over from year to year and be paid upon termination.
If you believe that your current or previous employer may be in violation of California labor laws regarding vacation pay, PTO, holidays, or sick pay, you may want to contact a California labor law attorney.