On September 29, 2024, California’s governor signed into law AB 2123.  Beginning on January 1, 2025, AB 2123 will eliminate employers’ ability to require employees to use up to two weeks of company-provided vacation before they start receiving paid family leave (PFL) insurance benefits paid by the state (or their employer, if the company has an approved voluntary plan that applies in lieu of the state program). AB 2123 represents the latest piecemeal change California has made to its PFL¹ program in recent years, following prior amendments that, e.g., removed the ceiling on taxable wages for employee contribution purposes, increased the monetary benefits an individual might receive, extended from six to eight weeks the amount of time PFL benefits might be available, and expanded covered uses to include qualifying military exigencies.

Why Even Require Two Weeks of Vacation Before an Employee Can Receive Benefits?

For some employers – and the state – there could be perceived benefits to requiring employees to use up to two weeks of vacation before an employee could begin collecting PFL benefits.

For the state, it could mean not having to pay out the full benefit (up to eight weeks of benefits in a 52-week period) to individuals who take time off from work for the following reasons:

• Care for a seriously ill family member (child, grandchild, grandparent, parent, sibling, spouse or domestic partner)²;
• Bond with a minor child within one year of the child’s birth or placement (foster care or adoption); or
• Participate in a qualifying exigency related to the covered active duty or call to covered active duty of the individual’s spouse, domestic partner, child, or parent in the U.S. Armed Forces.

Not every need for leave will require eight weeks off work, so if the individual must use company-provided vacation for up to two weeks, that eliminates the state’s need to pay for benefits during those two weeks, and, in some instances, an individual might need no more than two weeks off, completely relieving the state from having to pay any benefits.

For employers, requiring employees to use company-provided vacation before they receive state benefits might help reduce the odds of down-the-road disputes involving employees who, shortly after they return to work from an extended absence, want to use their banked vacation to go on an actual vacation, increasing the percentage of the year that an employee is not working. It might also be the employer’s only opportunity to require an employee to use company benefits provided specifically to be away from work when an employee is not working for multiple weeks (possibly months). That is because both the federal Family and Medical Leave Act (FMLA) and California Family Right Act (CFRA) potentially limit an employer’s ability to require employees to use paid time off benefits, e.g., vacation, sick leave, or PTO,  when an employee is receiving payment – even if only partial – under a disability plan or program during a qualifying FMLA or CFRA absence.

Options Available to Employers after the Changes Take Effect

Although removing the ability to require employees to use up to two weeks of vacation before they receive California PFL benefits might appear like an option is being taken away from employers, the change might also present new opportunities for employers.

For example, during a covered absence both the FMLA and CFRA require employers to maintain the same level of employee benefits, like healthcare, but if employees contribute to those benefits both laws also allow employers to require employees to continue making contributions to sustain coverage. Normally employee contributions are made via payroll deductions. If an employee is not working during an absence, however, they are not receiving a paycheck. Moreover, the state does not deduct from California PFL benefit payments it makes and send a portion to the employer to cover employee contributions. Accordingly, employers face a challenge.

Do they wait until the employee returns to work (assuming that happens) then collect the money the employee owes via future paychecks or do they make arrangements for the employee to periodically send the company money to cover the contributions throughout the absence? Neither is a perfect solution nor administratively easy, particularly if an employer does not receive advance notice that an employee will be absent before their leave begins.

But, if an employee uses their company-provided vacation benefits to “top off” or supplement their California PFL benefits – which for many employees will only provide partial wage replacement – during an absence, an employee would be receiving one or more paychecks so an employer could deduct from vacation pay an employee receives to cover the employee’s contributions wholly or partially. California PFL allows employees to “top up” their state benefits with company-provided benefits so long as the amount the employee receives from both sources does not exceed their normal pay.

For employers that must comply with San Francisco’s Paid Parental Leave Ordinance (PPLO), which requires supplementing pay³ for employees when they receive California PFL benefits for new child bonding purposes, the up to two weeks of vacation that can no longer be used before an employee receives California PFL benefits could be used to help satisfy an employer’s obligation to provide PPLO supplemental compensation during the period of time that the employee is receiving state benefits. That is because the San Francisco PPLO allows employers to apply up to two weeks of vacation that an employee has when their absence begins to help meet the employer’s PPLO supplemental compensation obligations. Before the state law changes, had an employer required an employee to use vacation before they received California PFL benefits, the employee might not have had much – or any – vacation available by the time they started receiving state benefits, meaning an employer would be entirely responsible for supplementing the employee’s benefits. After the amendments take effect, however, the odds increase of an employee having vacation available when the San Francisco PPLO supplemental compensation obligation kicks in, which could help offset the amount of compensation supplementing an employer might need to do.

Next Steps

With only a few months before this change takes effect, now is an opportune time for employers to review their policies concerning extended leaves of absence, vacation (or PTO), and employee contributions for benefits to see whether and how changes made by AB 2123 might affect operations in 2025 and future years. Additionally, for companies that condition entitlement to company-provided paid family-medical leave benefits on an employee applying for state benefits, or exhausting short-term company-provided benefits before they qualify for long-term company-provided benefits, AB 2123’s changes might provide the motivation to do a policy review that had been left on the back burner.