There is no requirement that a California employer provide paid vacation to employees; however, if an employer does have a policy which provides vacation, California law requires that any accrued and unused vacation must be paid out at the time employment is terminated.
California Labor Code Section 227.3 provides:
"Unless otherwise provided by a collective-bargaining agreement, whenever a contract of employment or employer policy provides for 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 in accordance with such contract of employment or employer policy respecting eligibility or time served; provided, however, that an employment contract or employer policy shall not provide forfeiture of vested vacation time upon termination."
Vacation is simply a form of deferred compensation and vacation pay vests as it is earned. An employer can require that the payment of a full vacation benefit may not mature until certain conditions are met, an employee has the right to at least the pro rata share of the pay that is already vested.
The vested vacation pay cannot be forfeited. An employer imposed condition subsequent to vesting, such as being employed on an anniversary date in order to qualify for payment of vacation pay, attempts to effect a forfeiture of vacation which is contrary to law under Labor Code Section 227.3 and against public policy. The established court decisions governing the interpretation and application of California Labor Code Section 227.3 have determined that an employee who is terminated or who terminates before an eligibility due date for vacation pay, is entitled to pro rata vacation pay for time worked up to the date of termination for that portion of vacation pay already vested.