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VACATION PAY: MUST IT ALWAYS BE PAID ON TERMINATION?
When employees leave their jobs, most of them have earned but not yet used all of their accrued vacation credits. The law varies from state to state in determining whether that accrued vacation must be paid to the employee when s/he leaves the company. A recent decision in Massachusetts finds that it must be paid. Electronic Data Systems Corp. v. Attorney General, DLR, E-1, June 15, 2009.
What makes this case interesting is that the employer had a vacation pay policy that said that employees who leave the company “whether voluntarily or involuntarily…will not be paid for unused vacation time (unless required by state law).” Under Massachusetts law, employees are entitled to receive all “wages” due on the date of their discharge from employment, and “wages due” includes vacation pay “due an employee…under an oral or written agreement.” The company credibly argued that the language of its policy -- a “use or lose” policy -- precluded any claim for accrued vacation pay based on “an oral or written agreement.” The company’s policy was not unusual since many company policies provide, for example, that vacations accrue but do not vest until a particular date so that an employee who leaves the company before that date is not entitled to vacation pay on departure.
The court rejected the company’s argument. It recognized the validity of a “use or lose” vacation policy, but said that under that kind of policy the employee must be given a reasonable time to use earned vacation before it is lost. The court found that vacation is earned day by day and that while employees can lose vacation by not using it, the value of unused vacation must be paid to the plaintiff when she left the company because she was not given a reasonable time to use the accrued vacation credits before her termination date.
The lesson here is that rules vary state by state. For example, in New York, if a company policy provides that employees accrue but cannot take vacation until a certain date, employees leaving before that date are not entitled to accrued vacation. The Massachusetts case illustrates the need for employers to know what is required in the state where the departing employee worked.
