ERISA Preemption Of Vacation Policies

Federal law preempts all state laws that relate to "any employee benefit plan" covered by the Employee Retirement Income Security Act. Employers may use the preemptive effect of ERISA to avoid California law on the accrual and vesting of vacation benefits, if they observe the rules for making vacation pay part of an ERISA benefit plan.

Under California law, vacation benefits are considered part of an employee's wages. Vacation pay accrues and vests day by day over the course of the employee's employment. Once the employee has earned the vacation pay, it cannot be forfeited. Use it or lose it policies are illegal. For a full explanation of the California rules on vacation pay, see Section 15 of the Labor Commissioner's Enforcement Policies and Interpretations Manual.

In  Massachusetts v. Morash, 490 U.S. 107 (1989), the Supreme Court held that ERISA did not preempt Massachusetts law that required employers to pay employees all accrued vacation and holiday pay upon termination of employment. Congress did not intent "to subject to ERISA's reporting and disclosure requirements those vacation benefits which by their nature are payable on a regular basis from the general assets of the employer and are accumulated over time only at the election of the employee." However, vacation pay plans that have assets independent of the employer's general assets might constitute ERISA benefit plans.

A plan that merely establishes a trust fund that reimburses the employer for vacation payments is not sufficient to bring the plan under ERISA, even if it qualifies as a tax-exempt Voluntary Employee Beneficiary Association (VEBA) trust under the Internal Revenue Code. See Millan v. Restaurant Enterprises Group, Inc., 14 Cal. App. 4th 477 (1993). By contrast, the Morash decision recognized that a trust created under multi-employer plan that was the actual source of vacation benefit payments probably would fall under ERISA. For a full explanation of the U.S. Department of Labor's interpretation of the relevant principles, see Advisory Opinion No. 2004-10A.