Last week my colleague, Michael Oswald, provided some very valuable information regarding the traps California’s vacation benefit laws hold for the unwary business.  I am taking that cue to let you know that there is an alternative that permits California businesses to provide vacation benefits to employees while avoiding the pitfalls of which Michael speaks.

The Employee Retirement Income Security Act of 1974, as amended (ERISA) preempts state laws that “relate to” employee welfare benefit plans.  Section 3(1) of Title I of ERISA defines the term "employee welfare benefit plan" to include: [A]ny plan, fund, or program . . . established . . . for the purpose of providing for its participants or their beneficiaries . . . (A) medical, surgical, or hospital care or benefits, or benefits in the event of sickness, accident, disability, death or unemployment, or vacation benefits, apprenticeship or other training programs, or day care centers, scholarship funds, or prepaid legal services, or (B) any benefit described in section 302(c) of the Labor Management Relations Act, 1947 (other than pensions on retirement or death, and insurance to provide such pensions).

An employer can create and fund a tax-exempt voluntary employees’ beneficiary association (VEBA) under section 501(c)(9) of the Internal Revenue Code.  This trust can be set up to provide benefits, including vacation benefits, for its members, the company employees.  As long as you follow the rules, which are legion (another reason for having in-house counsel), California has no jurisdiction.  Moreover, you can set up the rules for vacation you deem appropriate and fair.  For instance, the VEBA trust can have no accrual of vacation at all upon termination, and even a “use it or lose it” vacation policy, both of which are limited or forbidden under California law but are permitted under ERISA.

Do keep in mind that, at least initially, you will face California Labor Commission complaints by released employees who do not understand that California jurisdiction does not apply, and that the California Labor Commission is loath to enforce ERISA at the expense of the more generous California employment laws and will look for any opening to find that the VEBA does not qualify for ERISA protection.  Thus, it is imperative that the VEBA and the manner in which the program is maintained be bulletproof.  However, once past these hurdles, you can provide vacation benefits for employees in a cost-effective manner beyond the vagaries of California employment law.

Employers interested in learning whether these general principals may be applied to their specific needs should consult with experienced counsel.