California Guide · Updated 2026
California Vacation & PTO Rules
California treats vacation very differently from most states: once it is earned, it is the employee's money. That single principle drives almost every rule below — and trips up employers who bring policies in from other states.
Earned vacation is wages
In California, vacation and PTO vest as they are earned and are treated as a form of wages (Suastez v. Plastic Dress-Up). Earned time cannot be taken away.
No “use it or lose it”
A policy that wipes out accrued vacation at year-end is unlawful. What you can do is set a reasonable accrual cap — once an employee hits the cap, no more accrues until they use some down. That is the lawful way to limit balances.
Payout at termination (Labor Code §227.3)
When employment ends, all accrued, unused vacation must be paid outat the employee's final rate of pay, together with their final wages. Failing to include it can trigger the same waiting-time penalties as any other unpaid final wages.
PTO vs. sick leave — keep them separate
If you fold statutory paid sick leave into a single combined “PTO” bank, the entire bank is generally treated as vacation — meaning it must be paid out at termination. Keeping a separate, dedicated sick-leave bank (which does not have to be paid out) usually saves money.
A compliant policy
- Define the accrual rate clearly and put it in writing.
- Use a reasonable cap instead of forfeiture.
- Pay out all accrued vacation at separation.
- Decide deliberately whether to combine or separate sick leave.
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