California PTO Laws: What Employers Must Know (2026)

California is the state where a PTO policy copied from a template most often becomes a liability. The reason is a single principle that runs through everything: earned vacation is wages. Once an employee has earned it, it belongs to them the way a paycheck does, and you cannot take it back.

Everything below follows from that. This is general information rather than legal advice, and the specifics change — confirm current requirements with the California Labor Commissioner or an employment attorney before finalizing a policy.

What is actually required

Two things, and only two.

Paid sick leave is mandatory. Since the 2024 expansion, California employers must provide at least 40 hours or five days of paid sick leave per year to employees who work at least 30 days in a year. Employees accrue at a minimum of one hour per 30 hours worked, or you may front-load the full entitlement at the start of the year.

Vacation is not mandatory. No California law requires you to offer paid vacation or general PTO at all. But if you do offer it, the wage rules attach immediately.

That asymmetry is the thing to internalize: the state does not make you be generous, but it heavily regulates generosity once offered.

The four rules that follow from "vacation is wages"

1. No use-it-or-lose-it

A clause saying unused vacation expires on 31 December is unenforceable in California. You cannot delete earned wages because a date passed.

This is the clause most often inherited from a template written for a different state, and it is worth checking your handbook for today.

2. Accrual caps are the compliant alternative

You are allowed to stop people from accruing more once their balance reaches a ceiling. This is legal precisely because nothing is taken away — the employee keeps every hour they earned, and resumes earning as soon as they use some.

The cap must be reasonable. There is no statutory figure, but 1.5× to 2× the annual accrual is the conventional range. A cap of half the annual allowance would be hard to defend, because it makes forfeiture inevitable rather than optional.

PTO accrual caps covers the mechanics of setting one.

3. Payout at termination is mandatory

When employment ends for any reason, accrued unused vacation must be paid out at the final rate of pay — not the rate at which it was earned. If someone accrued vacation three years ago at a lower salary and leaves today, you pay today's rate.

Timing matters too: California requires final wages, including this payout, to be paid immediately on involuntary termination, or within 72 hours when an employee resigns without notice. Late final wages can trigger waiting-time penalties.

Run your current balances through the PTO payout calculator to see the number you are carrying.

4. Sick leave is treated differently

Sick leave that is kept separate from vacation generally does not have to be paid out at termination. This is the one meaningful advantage of keeping two buckets instead of one.

Separate vs combined: the California decision

For a small team in California, the lower-liability path is usually two buckets: a vacation balance with an accrual cap, and a separate sick balance capped at 80 hours. It is more to track, which is an argument for tracking it in something that does it automatically rather than by hand.

Front-loading sick leave as a simplification

If you front-load the full 40 hours or five days of sick leave at the start of each year, you avoid the accrual arithmetic and the carryover obligation for that bucket entirely. Employees get the whole entitlement on day one; nothing carries because nothing needs to.

For a small business, this is often the cheaper choice in administrative terms even though it is slightly more generous in cash terms. The sick leave accrual calculator will show you what accrual would have produced, so you can compare.

A compliant policy skeleton

Adapting the PTO policy template for California means three specific changes:

Carryover clause: "Unused vacation carries over from year to year. Your vacation balance is capped at 240 hours. While your balance is at the cap you will not accrue additional vacation; accrual resumes automatically once your balance falls below it. No earned vacation is ever forfeited."

Payout clause: "Accrued, unused vacation is paid out at your final rate of pay when your employment ends, as required by California law."

Sick leave clause: "You receive 40 hours of paid sick leave on 1 January each year, or on your start date if you join mid-year. Sick leave is separate from vacation, does not count against your vacation balance, and is not paid out on separation."

Those three paragraphs are the difference between a policy that holds up and one that does not.

Common California mistakes

• Copying a use-it-or-lose-it clause from a national handbook template. Unenforceable, and it signals to an employee that you have not checked.
• Paying out at the historic rate. The rate is the final rate, which is usually higher.
• Setting a cap so low it functions as forfeiture. A 1× cap on a generous allowance invites the argument that the cap is a workaround.
• Forgetting local ordinances. Several California cities, including Los Angeles, San Diego, San Francisco, and Berkeley, have their own paid sick leave rules that can be more generous than the state minimum. The stricter rule applies.
• Not tracking sick leave separately and then discovering the whole bank is payable.
• Missing the final-paycheck deadline. The payout obligation has a clock on it.

Where this usually breaks in practice

None of these rules are difficult to follow. They break because they are enforced by hand.

An accrual cap only works if something actually stops the accrual — a spreadsheet formula will happily keep adding hours past 240 forever, and the overage looks exactly like a correct balance until someone reconciles it. Sick and vacation only stay separate if every request is logged against the right bucket. Payout is only correct if the balance was correct.

SimplyPTO enforces accrual caps automatically, keeps leave types in separate balances, and shows a live payout figure per person so you always know the liability you are carrying. Start free for up to 10 people, or read paid sick leave laws for how other states compare.