First, there is no law that requires a California employer to pay its employees for vacation time, or to have a paid time off (PTO) policy. However, if an employer has agreed to provide, or pay, vacation time or PTO, it is considered "wages" and the following rules apply:

• Vacation Time Accrues as Work is Performed. Vacation time accrues each day the employee works. For example, if an employee is entitled to two weeks (10 days, or 80 hours) of vacation per year, after six months of work the employee will have accrued one week (5 days, or 40 hours) of paid vacation at a rate of 1.538 hours of vacation per week. Upon termination, however, the employer must calculate the accrued vacation time on a daily basis.
• Use it or Lose it Policies are Illegal. An employer may NOT have a vacation policy that says "use it or lose it" even if the employee has agreed to such a policy. Once vacation time has accrued, it cannot be taken away, or forfeited. The California Supreme Court in Suastez v. Plastic Dress-Up Co., 31 Cal.3d 774, 784 (1982) held that if an employer's policy or contract of employment provides for paid vacation time, the right to paid vacation time vests as the labor is rendered. Vacation pay constitutes deferred wages for services rendered, rather than an inducement for future services.
• Paid Vacation Is At The Discretion of the Employer. An employer, may have a written vacation policy and/or agreement that states that vacation time will not accrue for a specified period of time, e.g. earned vacation time will not begin to accrue until the employee's second year of employment. An employer may also have a written vacation policy that specifically excludes certain classes of employees, such as part-time, temporary, casual, and/or probationary employees.
• The Amount of Vacation Time That May Accrue May Be Capped. Similarly, an employer, may have a written employment agreement and/or policy that imposes a cap or ceiling on how much vacation time any employee may accrue so long as the vacation policy also states how vacation time is accrued, any caps on said accrual, and the pay rate at which it will accrue for non terminated employees. See, Boothby v. Atlas Mechanical, Inc., 6 Cal.App.4th 1595, 1601-1602 (1992) ; See also, Bell v. H.F. Cox, Inc., 209 Cal.App.4th 62, 75 (2012).
• The Employer May Impose Rules on How and When Vacation Time is Taken. Additionally, an employer may control how and when vacation time is taken with scheduling requirements, advanced notice and approval requirements, and even blackout dates.
• All Accrued Unused Vacation Time Must Be Paid at Termination. Upon termination, all accrued and unpaid or unused vacation time MUST be immediately paid to the employee at the employee's regular hourly rate of pay at the time of termination. Labor Code §227.3.

The California Department of Labor Standards and Enforcement maintains that a Paid Time Off policy must adhere to the same rules as a vacation policy. In Summation, Vacation time and "paid time off" is earned on a day-by-day basis; such days cannot be forfeited, the number of earned and accrued vacation / paid time off days can be capped, and if an employee has earned and accrued paid time off days that have not been used at the time the employment relationship ends, the employee must be paid for these days.