In February 2022, Los Angeles federal judge Dale Fischer ruled in Hartstein v. Hyatt Corporation that California law did not require Hyatt Hotels immediately to pay the over 7,000 employees it furloughed/temporarily laid off in March 2020, the start of the COVID-19 pandemic, the value of their accrued but unused vacation time.
Judge Fischer reasoned that the furloughed employees were not entitled to that payout until Hyatt made the furlough a permanent layoff in June.
The ruling was based on two provisions of the California Labor Code. Section 201 says “[i]f an employer discharges an employee, the wages earned and unpaid at the time of discharge are due and payable immediately.” Section 227.3 says when an employer provides paid vacations, “and an employee is terminated without having taken off his vested vacation time, all vested vacation shall be paid to him as wages at his final rate. …”
As I explained in my March 14, 2022 column, Judge Fischer held that under section 227.3, only a complete severance of the employment relationship constitutes a termination of employment requiring the employer to pay the employee the value of unused vacation time. Judge Fischer wrote: “Here, there was no complete severance. Hyatt continued to pay the employer and employee health insurance s, plaintiffs remained eligible to redeem complimentary hotel stays, and plaintiffs continued to accrue vacation time.”
The employees’ lawyer informed me he would appeal the ruling to the 9th Circuit Court of Appeals. On Sept. 22, the court of appeals issued a published opinion reversing this part of Judge Fischer’s ruling.
Why furloughed Hyatt employees were entitled to immediate payout of their earned, unused vacation time
This is how the 9th Circuit framed the issue: “Hyatt does not contest that it was required to pay its employees their accrued vacation pay when the employees were discharged. The question is when the employees were discharged within the meaning of California’s prompt payment provisions.” The court continued: “In contrast to Section 227.3, which establishes the right to accrued vacation pay, Section 201 addresses when those wages become due and payable — that is, immediately upon discharge.”
In the absence of case law addressing when an employee is discharged, the court of appeals adopted the enforcement guidance of the California Division of Labor Standards Enforcement to hold that “a temporary layoff with no specific return date within the normal pay period is a discharge within the meaning of § 201.” A broad reading of the term” discharge,” said the court, furthers the public policy behind Section 201 — “to avoid depriving employees of the necessities of life and making them ‘a charge upon the public.’”
The court concluded the hotel employees were entitled to a summary ruling in their favor that Hyatt violated the prompt payment provisions by not paying out the value of their vacation time when they were first temporarily laid off in March and waiting, instead, until Hyatt made the layoff “permanent” in June. “Although Hyatt’s actions are understandable given the uncertainty during the early period of the pandemic, the March 2020 layoff was a discharge within the meaning of § 201, triggering the prompt payment requirement, because there was no specific return date within the normal pay period.”
Was Hyatt’s violation of vacation payout obligation “willful,” entitling employees to waiting time pay?
Labor Code § 203 obligates an employer that “willfully fails to pay” all wages, including the value of unused vacation time, due at discharge to pay the employee a waiting time penalty of up to 30 days’ pay. An employer that had a good faith, reasonable belief that no wages are owed may be excused from waiting time penalties.
The court of appeals instructed Judge Fischer to address that issue when the case is returned to her. Judge Fischer may conclude that Hyatt’s “understandable” violation of § 201 was not, therefore, willful.
Lesson
Employers that furlough employees with no definite return date must immediately pay those employees the value of their accrued, unused vacation time. Furloughed employees should not continue to accrue vacation vacation time to avoid the employer incurring a continuous obligation to pay out its value.
Dan Eaton is a partner with the San Diego law firm of Seltzer Caplan McMahon Vitek where his practice focuses on defending and advising employers. He also is an instructor at the San Diego State University Fowler College of Business where he teaches classes in business ethics and employment law. [email protected]
