Pmt of unused vacation to EE's of a CA C Corp that is owned by an LLC if EE's own shares in the LLC.

Reply Mon 25 Jul, 2011 02:01 pm
Thank you in advance for taking time in reading this long email. The issue may be a little too complex for a simple answer, but I thought I'd give it a shot as it may be more straightforward that I feared.

The Subject Line above is the Cliff Notes version of my question. I am the CFO at a small, struggling California company and am unsure whether I need to pay vacation upon termination to employees in CA C Corp that is 100% owned by an LLC if the employees are also shareholders in the entity.

Here's a more detailed explanation...

My employer offers vacation benefits to employees, as detailed in a Employee Handbook. All of the employees are employed in California by a C Corp that is 100% owned by an LLC. As a small start-up, some employees were also given ownership units in the LLC. Therefore, some own a very small fraction of the entire entity. (I call them “employee/owners”.) I was informed by the CEO that, as owners, these employee/owners are not entitled to payment of unused vacation benefits upon termination, while employees that do not own units are entitled to vacation benefits upon termination.

I am trying to determine whether or not I need to accrue a vacation liability that would be paid, net of usage, to employee/owners upon termination. Note that the Employee Handbook does not distinguish between employee/owners and employees who do not own units in the LLC.

1. Given the above, is this correct and these employees/owners are not entitled to payment of unused vacation benefits upon termination?

2. If it is correct, is there a minimum level of ownership that an employee must hold? For instance, using an extreme example, if an employee has just one unit of ownership, since they are technically an employee/owner do they lose the right to receive unused vacation benefits upon termination? Or do they need a minimum level of ownership, such as 2% ownership for example?

Here's a wrinkle to the above question...

3. If it is correct, what if their ownership interest is not granted immediately and is instead vested over time? For instance, what if an employee is granted an ownership interest of 1,000 units that vests 50% after three years of service, 25% after four years of service, and 25% after five years of service? Even though technically the ownership does not become effective until later (after Year 3), do they immediately lose the right to receive vacation benefits upon termination prior to Year 3?

Finally, it would be great if I had the labor law code to cite in case I need to back up my actions with a reliable source. Can a citation to such a source be provided to the answers?

I know this is a lot. Thank you for addressing my questions.

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Reply Mon 25 Jul, 2011 02:22 pm
Note that this is a guess: employee/owners are going to be treated under the law exactly the same as any other employee. I have seen a somewhat similar situation (not regarding vacation pay) in a different state, and it turns out that an employee is an employee.

This is probably not a good place to look for such specific legal information. Getting what you really need may cost more that paying for accrued vacation time.
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