Unused Vacation Pay Policies Under Scrutiny by Michael E. Rowan |
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Many, if not most, employers have policies concerning payment for unused vacation time or accrued paid time off ("PTO") upon an employee’s termination. Often, such policies provide that employees are not entitled to payment for unused vacation time or PTO upon termination of employment or that an amount otherwise payable on termination will be forfeited if an employee fails to give adequate notice before resigning. Recent trends in the law suggest that employers should carefully examine these types of policies.
A change in Maryland law reflects a recent and striking example of this trend. A little-publicized policy change by the Department of Labor, Licensing and Regulation (“DLLR”) dramatically affects the validity of the unused vacation pay/PTO policies of many employers. Indeed, the recent DLLR policy change may expose unwary employers to substantial liability.
For years, employers in Maryland operated under the assumption that they could legally deny payment for accrued leave upon termination so long as such policies had been communicated to employees. In fact, DLLR’s guidelines specifically provided that these types of policies were valid and enforceable. The law in Pennsylvania with regard to accrued vacation and PTO was similar to Maryland’s in that an employer was not obligated to pay for accrued vacation time and/or PTO upon termination.
DLLR’s long standing policy concerning accrued leave abruptly changed following an August, 2007 unreported decision by Maryland's Court of Special Appeals. In Catapult Technology, Ltd. v. Paul Wolfe, No. 997 (August 20, 2007), several employees resigned without providing two weeks notice. The company had a policy providing that “if the employee terminates their employment without first providing at least two weeks notice in writing, that employee forfeits any right to any universal leave that may have been accrued while employed by the company.” Pursuant to this policy, Catapult Technology refused to pay accrued and unused leave to the resigning employees.
Notwithstanding the company’s policy and the longstanding DLLR position, the employees initiated legal action against Catapult Technology for accrued leave pay. The trial court found that because leave was based upon the number of hours worked, leave was a “wage” that could not be withheld upon termination. The decision of the trial court was upheld on appeal. The appellate court concluded that because leave was given “in remuneration” for hours worked, the employees were entitled to be paid for all leave earned while employed, regardless of any company policy to the contrary.
Though an unreported decision, the DLLR quickly adopted the Catapult Technology findings and revised its guidelines regarding payment of vacation leave and PTO. The revised guidelines now provide:
When an employee has earned or accrued his or her leave in exchange for work, an employee has a right to be compensated for unused leave upon the termination of his or her employment regardless of the employer’s policy or language in the Employee Handbook.
In light of this recent change, we strongly advise all Maryland employers to review and, where appropriate, amend their vacation leave and/or PTO policies and procedures. Additionally, Maryland employers must be certain to pay all accrued vacation time to employees upon termination, regardless of any company policies to the contrary and regardless of the reason for termination.
While there have been no similar recent changes in the law concerning payment for accrued unused vacation time in Pennsylvania, employers should be aware that such changes may be forthcoming, particularly in light of the current national trend.
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