It's probably best to use the current rate. The California DLSE analyzed the same issue in a 1994 opinion letter, and stated that a cash-out based on a rate lower than the employee's current rate might be void under Labor Code section 206.5: http://www.dir.ca.gov/dlse/opinions/1994-03-08.pdf.
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The employee should have their vacation time cashed out at the current rate - this is both a DLSE guidance and best practices policy to reduce your exposure to a lawsuit or other legal claim.
In addition, the employer is required to cash out vacation time when the employee separates (is either fired or resigns). Unless your employment manual or current policy allows otherwise, employers are not required to cash out vacation time whenever the employee requests it.
You should speak with an employment attorney who specializes in counseling employers about best ways to handle cashing out vacation time, and what policies to set up for future cash outs.
The above is my opinion based on limited information you provided– this is NOT legal advice. You have not retained me as your attorney. I am not your legal representative nor am I responsible for any action you may take in reliance of my opinion. No attorney-client or confidential relationship exists or will be formed based on your question and my response. Consult your attorney or legal representative for legal advice regarding your specific matter.
It should be paid at the current rate just as if the employee actually took the vacation time, he/she would receive pay at the current rate.
As the previous responses and the DLSE opinion letter reference, an employer is not legally required to "cash out" vested vacation benefits at any time other than when an employee separates from employment. Allowing employees to "cash out" at any other time is a voluntary choice of the employer. Note, however, that if the employer chooses to allow employees to cash out at any time other than separation, and communicates this to employees, verbally or in writing, that representation likely creates a contractual obligation to allow employees to "cash out" before separation.
The employer should use the current rate for any cash out, but otherwise, the employer is, for the most part, free to set terms of any early cash out (e.g., only available to employees who have worked for the employer a certain period of time; whether the cash out can or must be either partial or full). In stating any policy for early cash out, the employer should include statements demonstrating that the employer is complying with any potential legal requirements applicable to an early cash out (e.g., a statement that the cash out will be paid at the employee's wage rate [or salary equivalent for exempt employees] at the time of the cash out), and any appropriate statements to fully define the policy to prevent any future misunderstanding (e.g., a statement that the early cash out will reduce the amount of vested vacation time by the amount of vacation time cashed out).
A consultation with an employment lawyer regarding all relevant circumstances, and to prepare the best possible policy for early cash out (if the employer chooses to do so) under all relevant circumstances is recommended.
Please be advised that this response is for informational use, does not constitute legal advice, and does not create any attorney-client relationship, which can be formed only through the mutual and explicit execution of an attorney-client agreement. This response is based on the limited facts and issue definition provided, and the proper course of action may change with additional facts or further definition of the issue. Please also be advised that this response addresses only California state law on the issue presented and the answering party is not licensed to practice law in any state other than California.
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