Court Backs Vacation Pay After Job Loss

SAN FRANCISCO —  In a potential billion-dollar victory for California workers, a federal appeals court on Friday restored a state law requiring payment of partial vacation benefits in cash when an employee is terminated.

A three-member panel of the U.S. 9th Circuit Court of Appeals reversed a September, 1983, ruling by Los Angeles federal court Judge Richard Gadbois, who had decided that the state law conflicted with federal law.

The case has attracted national attention, with the Reagan Administration, the states of New York and North Carolina, and the AFL-CIO supporting California’s position that the benefits are valid.

Under the 1972 California law, as interpreted by a unanimous July, 1982, state Supreme Court decision by Chief Justice Rose Elizabeth Bird, workers whose company has a vacation plan start earning vacation benefits their first day on the job. If they are let go at any time, they must be paid for unused vacation time on a prorated basis--even if company policy requires a full year’s work to collect vacation benefits.

Union Pacts May Be Exempt

For example, a worker who was laid off after six months by a company that provided two weeks of vacation a year would be entitled to a week’s pay, despite a company rule that vacation rights did not “vest” for a year.

The law appears to exempt union contracts, but unions had a major stake in Friday’s decision, because many collective bargaining contracts provide for prorated vacation pay to be enforced by the state labor commissioner.

When the state Supreme Court ruled, then-state Labor Commissioner Patrick Henning said the withheld vacation benefits must be paid retroactively for the four years before July, 1982, in companies with written vacation plans, or for two years for those with oral agreements. The 1983 ruling by Gadbois barred the labor commissioner from enforcing the law.

After Friday’s ruling, Gov. George Deukmejian’s labor commissioner, C. Robert Simpson, said he was inclined to disagree with Henning and deny retroactive benefits, unless a court ruled otherwise.

On Friday, Henning told The Times that the rationale for the retroactivity periods was simple. In a normal California case in which it was determined that an employee or group of employees was owed back wages that had been improperly withheld, there is a four-year retroactivity period for a company with a written wage policy and a two-year retroactivity period for a firm with an oral agreement, he said.

Henning, now a member of the state Agricultural Labor Relations Board, said he ordered the same retroactivity periods in the vacation case “because the principle was the same and it was appropriate to follow the procedure used in the back-pay cases.”

A suit was brought against Henning by six major California employers’ associations whose members have adopted programs forbidding payment of prorated vacation pay and for forfeiture of vacation pay of employees not actively employed on specified eligibility dates.

On Friday, Richard Simmons, lawyer for the employers’ groups, estimated the possible retroactive benefits at $1 billion, and said it could cost companies another $1 billion a year to pay vacation benefits in the future under the new ruling. He predicted the businesses would appeal the decision.

Federal Act Cited

The employers’ groups, led by the California Hospital Assn., argued that the state benefits were barred by the 1974 federal Employee Retirement Income Security Act, or ERISA.

The act calls for exclusive federal regulation of “employee benefit plans.” But federal labor officials, including the Reagan Administration, have interpreted the law to allow state regulation of vacation benefits paid out of “the employer’s general assets,” as opposed to a separate fund. That interpretation would allow the California benefits.

The appeals court, in a ruling by Chief Judge James Browning, said ERISA was aimed at stopping two abuses: mismanagement of pension funds, and failure to pay pension benefits.

“Traditional vacations during which the employer continued to pay the employees’ regular wages presented neither of the evils Congress intended to address,” Browning said. He also said vacations could be considered wages rather than benefits.

‘Will Hurt Employees’

Simmons predicted that many smaller companies would eliminate their vacation plans rather than comply with the decision, and that others would set up trust funds to pay vacation benefits, an apparent exception to the state law.

The ruling “will hurt employees more than it will help them,” Simmons said.

But Marsha Berzon, lawyer for the national AFL-CIO, said the alternatives described by Simmons were “extremely unrealistic.”

“People pay vacations because people want paid vacations. That’s how they get their employees,” she said.