California Labor Code 227.3: Vacation Payout at Termination

When you leave a job in California, your employer owes you a payout for every hour of accrued, unused vacation, and California vacation pay at termination is treated as wages under Labor Code Section 227.3. The money is calculated at your final rate of pay and must be included in your last paycheck, whether you quit, were fired, or were laid off. Miss the deadline, and the employer can owe up to 30 additional days of wages as a penalty.¹

Why Unused Vacation Is Money You Are Owed

California doesn’t force any employer to offer vacation. But once an employer does offer it, whether through a written policy, a handbook, or an employment contract, Section 227.3 treats every hour you earn as a vested wage. It accrues as you work, it belongs to you the moment it accrues, and the employer cannot take it back.²

That vesting rule is what makes the termination payout automatic. A “use it or lose it” policy that wipes out unused vacation at year-end is unenforceable in California, so a balance you carried across the calendar boundary is still yours on your last day. The same rules apply if your employer uses a combined paid time off bank instead of separate vacation and sick leave. PTO vests, can’t be forfeited, and must be paid out at separation.²

One boundary matters up front. If you’re covered by a collective bargaining agreement, the union contract can set different vacation payout terms, because Section 227.3 applies “[u]nless otherwise provided by a collective-bargaining agreement.”¹ Check the CBA before assuming the default rules apply.

What the Payout Must Include

Every hour of accrued, unused vacation goes into your final paycheck. The statute draws no line between voluntary and involuntary separations, so it makes no difference whether you resigned, were fired, or were laid off.¹

The employer also cannot condition the payout on anything. You don’t have to give notice, return equipment, or sign a release to get vacation money. It’s already your property.

How the Payout Is Calculated

The payout uses your final rate of pay, not the rate you were earning when the vacation accrued. If you were hired at $20 an hour and worked your way up to $25 by your last day, the whole balance is paid at $25.¹

For salaried workers, convert the salary to an hourly rate first. A $78,000 salary divided by 2,080 annual work hours comes to $37.50 per hour. Multiply that by your unused vacation hours.

Commission earners and workers with fluctuating pay have the trickiest calculation. The “final rate” for these workers is a regular rate that reflects their actual earned compensation, so shift differentials and non-discretionary bonuses that are part of your regular pay can factor in. An employer that quietly applies only a base hourly rate and ignores commissions may be shorting your balance. If your compensation is anything more complicated than a flat wage, work through the numbers carefully.

When the Final Paycheck Is Due

California sets tight deadlines for the final paycheck, and your vacation payout has to be in it.³

Fired or laid off: the final paycheck is due immediately at the time of termination.⁴
You quit with at least 72 hours’ notice: the check is due on your last working day.³
You quit with less than 72 hours’ notice: the employer has 72 hours from your resignation to issue the check. You can ask that it be mailed, and the mailing date counts as the payment date.³

A single day late is enough to expose the employer to a penalty.

The Waiting Time Penalty If Your Employer Pays Late

When an employer willfully fails to pay your full final wages on time, including vacation, Labor Code Section 203 adds one day of wages for every calendar day the payment is late, capped at 30 days.⁵ The 30 days count weekends and holidays, not just business days. The penalty stops running when you’re paid or when you file suit, whichever happens first.⁶

The daily rate is your regular hourly rate multiplied by the hours in your normal workday. At $30 an hour and an eight-hour day, that’s $240 a day, or $7,200 at the 30-day maximum. Occasional overtime doesn’t count toward the daily rate, but regularly scheduled overtime does.⁶

“Willful” is a lower bar than it sounds. The employer doesn’t have to have acted maliciously. If it knew wages were due and didn’t pay them on time, that’s enough. There’s a narrow defense when the employer had a genuine good faith dispute about whether the money was owed, meaning a defense grounded in law or fact that would eliminate the wage obligation if it succeeded. The defense doesn’t have to win, but it has to be reasonable and supported.⁷ An employer who simply forgot to include vacation will have a hard time using it. A real disagreement about how many hours you actually accrued is closer to the mark.

What Gets Withheld From the Payout

Vacation pay is taxable, and if it lands in a separate check from your regular wages, the employer treats it as supplemental wages. That usually means flat-rate withholding rather than your normal W-4 calculations.

The federal flat rate on supplemental wages is 22% for most employees, rising to 37% once your supplemental wages for the year exceed $1 million.⁸ California adds a flat 6.6% for state income tax.⁹ Social Security withholding of 6.2% applies to earnings up to $184,500 in 2026, and Medicare withholding of 1.45% has no cap.¹⁰

On a $5,000 payout, that can be roughly $1,800 held back before the deposit hits. Withholding is not the same as your final tax bill, though. If too much came out, you’ll square it up on your return.

Filing a Wage Claim If You Aren’t Paid

If your employer refuses to pay your vacation or shorts the amount, file a wage claim with the California Division of Labor Standards Enforcement, also called the Labor Commissioner’s office. You don’t need an attorney. Claims go through online, by email, by mail, or in person.¹¹

Bring your employer’s name and address, your pay stubs, your offer letter or contract, the written vacation policy, and any records you have of vacation earned and used. After you file, the DLSE notifies both sides within 30 days whether it will hold a hearing, and schedules the hearing within 90 days of that determination.

Small claims court is another route for smaller amounts. Individuals can sue for up to $12,500, so if your unpaid vacation plus the waiting time penalty fits, small claims can be faster.¹²

How Long You Have to File

The filing deadline depends on how the vacation arrangement was documented: two years if it rested on an oral promise, four years if it came from a written contract or policy.¹¹ Most vacation policies live in an employee handbook, so the four-year window applies to the majority of claims. The clock starts on your last day of work, since that’s when the payout became due. Waiting time penalties follow the same limitations period as the underlying wage claim.⁵

Filing sooner is better. Evidence is easier to gather while it’s still fresh, and a formal claim tends to move an employer faster than informal follow-up calls.

1
California Legislative Information. California Code LAB 227.3 – Payment of Vested Vacation Time
2
Department of Industrial Relations. Frequently Asked Questions – Vacation
3
Department of Industrial Relations. Final Pay Requirements
4
California Legislative Information. California Code LAB 201 – Payment of Wages Upon Discharge
5
California Legislative Information. California Code LAB 203 – Penalty for Willful Failure to Pay Wages
6
Department of Industrial Relations. Waiting Time Penalty
7
Department of Industrial Relations. Definition of Willful
8
Internal Revenue Service. Publication 15 (2026), Circular E, Employer’s Tax Guide
9
Employment Development Department. Personal Income Tax Withholding Information Sheet
10
Social Security Administration. Contribution and Benefit Base
11
Division of Labor Standards Enforcement. How to File a Wage Claim
12
California Courts. Small Claims in California