In California, vacation pay is considered another form of wages that vests as it is earned. An employer’s policy that provides for the forfeiture of vacation pay that is not used by a specified time which is also called a “use it or lose it” policy is illegal under California law and will not be recognized by the state’s labor commissioner.
However, California law does allow employers to place a cap or ceiling on vacation accruals. This is allowable under California law because while a ‘use it or lose it’ policy results in a forfeiture of accrued vacation pay, a cap simply places a limit on the amount of vacation that can accrue. This means that once a certain level or amount of accrued vacation is earned but not taken, no further vacation or vacation pay accrues until the balance falls below the cap.