Sabbatical Programs Under Attack In California

     A recent California Court of Appeal ruling involving sabbatical programs typifies what is meant by the old adage "no good deed goes unpunished."

     Sabbatical programs were the rage for many years. If you were lucky enough to work for a company which offered one, it meant that you could look forward to a lengthy period of time away from work with full pay.  Nice work if you can get it.

     Recently, a former employee of Silicon Valley chipmaker Advanced Micro Devices filed a class action lawsuit over AMD's generous sabbatical program.  It seems that Eric Paton left the company before taking his sabbatical.  On his way out, he demanded to be paid for the sabbatical.  When AMD refused, Mr. Paton responded by filing a class action lawsuit on behalf of himself and other former AMD staffers who, like him, did not get paid for their sabbatical when they left AMD.

     In a case of first impression, a California Court of Appeal has suggested Mr. Paton and his cronies may indeed have a case.  If you have a sabbatical program, or may be contemplating starting one, here is what you need to know about the case.

    Background.  California has strict rules regarding the payment of wages upon termination of employment.  Whenever an employment relationship ends (regardless of the reason) the employer must pay the employee all wages due and owing at the time of termination.

    Over thirty years ago, the California Supreme Court ruled that terminating employees also must be paid for any unused earned vacation pay.  And, if the employee worked only part of the year, they are to be paid a pro-rata share of the annual vacation allotment.

    In most cases, this payment must be made on the employee's last day of work.  To encourage employers to pay the final wages and vacation pay promptly, the law imposes a stiff penalty.  According to the California Labor Code, an employee's wages continue to accrue until paid, up to a maximum of thirty days. These so-called "waiting time penalties" often are greater than what's owed at the time of termination.

    What's worse, if the employee files suit to collect unpaid wages and succeeds, the employer is saddled with the employee's attorneys fees on top of the unpaid wages and penalty.

    The California Division of Labor Standards Enforcement published several opinion letters which discuss the application of the state's vacation vesting rules to sabbatical programs.  Generally, the state agency takes the position that a sabbatical will be treated like vacation pay, and subject to pro-rata vesting rules, unless all of the following exists: (1) the sabbatical is for an extended period of time beyond what is granted for vacation; (2) the sabbatical does not replace vacation that is normally earned during the year; (3) sabbatical leave is limited to only high-level managers and professionals; and (4) the sabbatical is granted infrequently, typically every 7 years.

     The AMD Class action.  AMD had a sabbatical program that was available to all salaried employees after 7 years of service.  The stated purpose of the program was to provide time away from work for "enrichment and revitalization" and was offered as a perk to attract and retain employees.  Eligible employees could take 8 weeks off all at once or two 4-week sabbaticals.  Employees had two years to take the sabbatical once they became eligible, and forfeited their eligibility if the sabbatical wasn't taken before the employment terminated.

     Round one of the case went to AMD.  AMD filed a motion asking the trial judge to throw out the case because the sabbatical program was not the legal equivalent of a vacation and AMD should not have to treat it as such when employees like Mr. Paton left the company.  The trial judge agreed with AMD and dismissed the case.

     Round two went to Mr. Paton.  The appellate court thought that AMD's case was not so iron clad as to preclude Mr. Paton and other former employees from having their day in court.  The Court of Appeal pointed to features of the AMD sabbatical program which could allow a jury to conclude that Mr. Paton was right.  Accordingly, the appellate judges reinstated the case and directed the lower court to conduct a trial on the issue.

     If the case does not settle, then AMD will have the opportunity to prove that its sabbatical program is indeed an authentic sabbatical which is not be subject to the pro-rata vesting and payout rules applicable to vacations.  

     In reaching its conclusion, the appellate court made a number of findings that provide insight into when a sabbatical will and won't be deemed the legal equivalent of vacation.

     The first thing that the appellate court did was look at the criteria established by the state agency for evaluating sabbaticals.  The court adopted several of those factors, rejected one, and added an additional factor to the analysis.

     The court agreed with the agency that a sabbatical must be granted infrequently.  Although every 7 years is the typical period, it said that a shorter period may be justified depending on the industry.

     Next, the court agreed that the duration of the sabbatical must be longer than the amount of time granted for vacations.

    Third, the sabbatical must be granted in addition to regular vacation, and the employer's vacation benefit must be comparable to the average vacation benefit offered in the marketplace.

     Finally, the court added a fourth factor - the employee taking the sabbatical is expected to return to work when it is over.

    The court also disagreed with the state agency about limiting sabbaticals to high-level managers and professionals.  The court held that an employer may offer sabbaticals to all employees, so long as the leave is intended to retain experienced employees and enhance their future service to the company.

    Applying these factors to the AMD program, the court found that: (i) AMD's sabbatical program was based on the employee's length of service, similar to vacation plans; (ii) the policy did not expressly require the employee to return to work after the leave; (iii) employees were not required to use the sabbatical for any specific purpose connected to work; (iv) the duration of 4 weeks was very similar to amount of vacation; (v) there was no evidence offered on what the typical amount of vacation was at AMD's competitors; and (vi) there was insufficient evidence to explain why AMD offered employees sabbatical in the first place.

    In the face of all of this, the court found that AMD failed to meet its burden to conclusively establish that the sabbatical was not a vacation.

   To avoid costly claims, employers offering sabbatical programs must take steps to ensure that the program is a true sabbatical and not just additional vacation.  The program must be carefully worded to meet the criteria laid out by the appellate court.  If the sabbatical is considered to be vacation time, it will be subject to the pro-rata vesting rules and must be paid at the time of termination.  The failure to do so could subject the company to costly legal claims like those pursued against AMD.

     If you have a sabbatical presently, but don't wish to take the risk of a lawsuit, great care must be given to how the program is discontinued.  If the program may be deemed the legal equivalent of a vacation, then the vested benefit cannot be taken away or forfeited.

     Please call your Firm contact if you have any questions, or to review your sabbatical program to ensure compliance.  (818) 508-3700, or visit us on the web, at www.brgslaw.com

Sincerely,

Richard S. Rosenberg

Partner

BRG&S, LLP