Our company imposed a temporary 3-month salary reduction of 25% due to financial difficulty. If a salaried, exempt employee were to quit during this 3-month period, should the accrued and unused vacation be paid out at the regular or reduced salary level?

According to Labor Code Section 227.3, it states that the vested vacation shall be paid at the final rate of pay but it also says that the principles of equity and fairness should apply.

227.3. Unless otherwise provided by a collective-bargaining
agreement, whenever a contract of employment or employer policy
provides for paid vacations, and an employee is terminated without
having taken off his vested vacation time, all vested vacation shall
be paid to him as wages at his final rate in accordance with such
contract of employment or employer policy respecting eligibility or
time served; provided, however, that an employment contract or
employer policy shall not provide for forfeiture of vested vacation
time upon termination. The Labor Commissioner or a designated
representative, in the resolution of any dispute with regard to
vested vacation time, shall apply the principles of equity and
fairness.

It would be fair if all the accrued vacation before the salary reduction took effect is paid out at the regular rate while vacation accrued afterwards is paid out at the reduced rate.

Interestingly enough, Labor Code Section 204.3 uses the final regular rate or average over past 3 years of employment, whichever is higher, as the basis for compensating time off.

204.3
(d) An employee who has accrued compensating time off authorized
to be provided under subdivision (a) shall, upon termination of
employment, be paid for the unused compensating time at a rate of
compensation not less than the average regular rate received by the
employee during the last three years of the employee's employment, or
the final regular rate received by the employee, whichever is
higher.

The only comment I have is that it says The Labor Commissioner or a designated representative, in the resolution of any dispute with regard to vested vacation time, shall apply the principles of equity and
fairness.
(emphasis mine)
Which means that only comes into play if there is a "dispute" and a claim/complaint is filed.

I'm not sure what your question is. :confused:

Thank you for the response, pattymd. My question is whether the accrued vacation should be paid out at the regular or reduced rate.

What if the salary is reduced to minimum wage and the employee is terminated and the accrued vacation is paid out at the minimum wage rate? Even though the code says vacation should be paid out at the final rate, is that really the intent of the law?

If a wage claim is filed for the original scenario where vacation is paid out at 75%, what is your take on the chance of winning?

The Labor Code you cited of "average of the last three years" would appear to apply and the Labor Commissioner would likely consider that "fair and equitable" if asked to decide the issue.

You can suggest to your employer to consider cutting the 25% from a work week instead of cutting from salary, having employee working 30 hours per week while keeping the same wage and replace the remainder 10 hours with vacation (reducing liability). If decide not to use vacation or employee don’t have vacation to use for replacement of this 10 hours, employer can participate in the Work Sharing Program with EDD, it basically a program where employee can claim for unemployment for the 10 hours which not work (partial pay for 10 hours with EDD).