theworkplace.biz
MA Supreme Court takes tough stance on vacation pay.
George L. Chimento
June 15, 2009
Introduction
Massachusetts employers should review their vacation and paid time off ("PTO")
policies, to be sure they comply with a recent MA Supreme Court decision,
ELECTRONIC DATA SYSTEMS CORPORATION vs. ATTORNEY GENERAL & another, SJC 10260 (the
"Decision"). [Note to lawyers: the link is to the slip opinion.]
The Court ruled that EDS, a Massachusetts employer, must pay for accrued
vacation time when it terminates an employee. An employer policy which defined
unused vacation time as "unearned" and forfeitable was declared void. The Court
upheld an Attorney General citation requiring EDS to pay the vacation accruals plus
a 200% penalty.
This article reviews the Decision, and what employers should do so that they
administer vacation and PTO policies appropriately in Massachusetts. It points out
the questions which are still unanswered. Finally, it reviews failed attempts to
structure vacation policies as ERISA plans, so that they might be exempted from
state law requirements.
The statute and the Attorney General's 1999 opinion
The material portions of G.L. c. 149. §148 (the Wage Act") provide:
The Decision defers to 1999 views of the MA Attorney General, expressed in
Advisory 99-1 (the "Advisory").
1. If vacation time is part of the compensation package, the rights to it accrue just
like other wages.
2. Unless another accrual schedule is specified, vacation time accrues in the time
period in which the employee actually works.
3. If an employer terminates an employee with accrued vacation time, it must pay
equivalent wages on the day of termination, regardless of its policy.
The Decision puts to rest an argument that the Wage Act was only meant to
protect payment for vacation time that had been used, but not yet paid for, at the
time of termination. Although paid vacation is not required in Massachusetts, if it
is granted, accrued rights to it are protected as "earned wages."
The Court agrees with the illogical concept of "use it or lose it"
EDS asked a good question in its argument. If vacation pay is earned and
non-forfeitable, why does the Advisory permit vacation carryover policies, which
require employees to use accumulated vacation time by a certain period or to lose
it? If an employer can grant vacation under a condition which permits its loss
under a carryover policy, is vacation truly an earned and non-forfeitable wage? If a
"use it or lose it" condition is acceptable, doesn't that mean that a right to paid
vacation is not really earned pay at all, so why can't other conditions be added to
its grant?
The Court stretches for an answer, and can do no better than the philosophy in
the Advisory. Vacation pay is not forfeited, it says, if its "loss" occurs after a
reasonable period of time when vacation could have been used. (Query, would
that mean an employer can keep a paycheck if it is not picked up within a
reasonable period after it is earned?) To its credit, the Court does not use the
bizarre argument in the Advisory that a carryover is just a cap and not a forfeiture
at all. In short, the response to the EDS argument was not convincing. If vacation
can be granted subject to a "use it or lose it" condition, why can't it be granted
subject to the condition that it is forfeited if employment terminates?
Getting back to the practical, this part of the decision is welcome news, of course,
for employers. We'll take it. "Use it or lose it" vacation policies are confirmed in
Massachusetts.
One caveat. The Advisory requires that employees receive adequate notice of "use
it or lose it" features, and that employers "must ensure that employees have a
reasonable opportunity to use the accumulated vacation time within the time
limits." In thinly staffed work-places, that requirement to "ensure" reasonable
opportunity to use the forfeitable vacation time could be open to challenge.
Voluntary quits are not covered by this decision
The Decision involved rights of an employee who had been terminated in a job
reduction. As long as the Court was dispensing extra wisdom about carry-over
vacation policies, why didn't it answer the burning question? Does an employer
still have to pay if its vacation policy says that accrued vacation is forfeited if an
employee quits (or quits without adequate notice)?
The Advisory is unambiguous that the reason for termination does not matter:
Justice Botsford, who wrote the Decision, was not so sure she agreed with the
Advisory on this issue, and concluded with a warning that the Decision was not
intended to address the rights of a person who "leaves a job voluntarily." Her
concern on this issue emanates from the plain English of the Wage Act, which only
protects employees who are discharged from employment.
Does "discharge" mean "fired," or simply a departure from the employer's service
and a discharge from further service obligations? Considering the adamant
position of the Advisory, an employer takes a significant risk if it withholds vacation
pay from an employee who has terminated, regardless of the reason.
PTO policies
The Decision only dealt with vacation days. Many employers have developed PTO
policies and do not require an employee to differentiate between vacation,
sickness, and other reasons when taking time off. The Advisory warns that unless
the employer keeps records which differentiate the types of days, that they will
probably all be considered vacation days that must be reimbursed if employment
terminates.
A PTO policy can get an employer in trouble if it contains a generous allotment of
"any reason" days. Will all the unused days be considered vacation days if an
employee is terminated? Probably. An employer could take the position that only
x% of the days are for vacation, and that the system is an honor system if an
employee takes more. It could also provide that days will be considered "vacation
days" unless the employee advises to the contrary. That can be complicated
however, and works against the purpose of a PTO policy, which is not to require
differentiation of days. There is no fully satisfactory answer, and employers for
whom payment of vacation accruals is a problem may want to transition away from
a PTO policy.
What about ERISA?
Vacation plans are described as a type of ERISA welfare benefit plan. Is it possible
that ERISA applies, and that state law reimbursement requirements of the Wage
Act are preempted?
That was actually the view of the Massachusetts Supreme Court in 1989. It opined
that the Wage Act was not enforceable, because it established rules for
administering a vacation plan and ERISA does not allow state regulation of benefit
plans, unless in the context of regulating insurance policies. The US Supreme Court
threw a big curve ball and overruled our Supreme Court in Massachusetts v.
Morash, 490 U.S. 107 (1989). It decided that the Wage Act is really more of a
payroll statute, and that an employer who pays vacation pay is not sponsoring or
administering a "vacation plan" within the meaning of ERISA.
Well, that got the ERISA lawyers thinking. What if the employer set up a separate
trust, qualified it as a VEBA under IRC §501(c)(9), appointed a fiduciary, and made
all vacation payments from the trust? And what if that trust provided that
terminated employees do not get vacation pay?
Denny's Restaurants gave it a try. California, which has a statute similar to the
Wage Act, sued in state court. The federal courts (up to the US Supreme Court)
refused to take the case. Denny's also asked the US Department of Labor to rule
that its trust was an ERISA welfare benefit plan, which would have preempted
California law. The Department refused in Advisory Opinion 2004-08A:
Denny's finally gave up, and agreed to a $7.8 million settlement with California's
Division of Labor Standards Enforcement.
Conclusion
In Massachusetts, an employer does not have to provide paid vacation time.
Employers who do provide paid vacation time should realize they must pay the
accrued time to terminating employees, and a creative "policy" won't change the
obligation.
In the case of employees who quit, there is a slim chance that the MA courts may
decide there is no payment obligation, provided the policy clearly states that. The
Attorney General can be expected to resist, of course, and who wants to invite the
Attorney General to examine overtime, holiday pay practices, and every other
wage and hour issue that exists at even the most conscientious workplace?
As for ERISA, the Denny's case indicates that even if a single employer plan could
be developed that passed muster under federal standards, it would be a hard and
uncertain fight to deny accrued vacation pay to terminated employees.
The best solution may be for MA government to consider whether the Wage Act is
helping (or harming) employees and job creation. Why raise an obstacle for
employers that want to provide paid vacations, but simply do not want to pay the
cash equivalent to those who have left their employment? In tough times, will the
Wage Act encourage employers not to offer paid vacation at all?
________________________________________________________________
This article is provided as a courtesy and may not be relied upon as legal advice, or to
avoid taxes and penalties. Distribution to promote, market, or recommend any
arrangement or investment to avoid or evade taxes, including penalties, is expressly
forbidden. Any communication with the author as to its contents, does not, of itself,
create a lawyer-client relationship. Under the ethical rules applicable to lawyers in
some jurisdictions, this may be considered advertising.
return to theworkplace.biz
MA Supreme Court takes tough stance on vacation pay.
George L. Chimento
June 15, 2009
Introduction
Massachusetts employers should review their vacation and paid time off ("PTO")
policies, to be sure they comply with a recent MA Supreme Court decision,
ELECTRONIC DATA SYSTEMS CORPORATION vs. ATTORNEY GENERAL & another, SJC 10260 (the
"Decision"). [Note to lawyers: the link is to the slip opinion.]
The Court ruled that EDS, a Massachusetts employer, must pay for accrued
vacation time when it terminates an employee. An employer policy which defined
unused vacation time as "unearned" and forfeitable was declared void. The Court
upheld an Attorney General citation requiring EDS to pay the vacation accruals plus
a 200% penalty.
This article reviews the Decision, and what employers should do so that they
administer vacation and PTO policies appropriately in Massachusetts. It points out
the questions which are still unanswered. Finally, it reviews failed attempts to
structure vacation policies as ERISA plans, so that they might be exempted from
state law requirements.
The statute and the Attorney General's 1999 opinion
The material portions of G.L. c. 149. §148 (the Wage Act") provide:
The Decision defers to 1999 views of the MA Attorney General, expressed in
Advisory 99-1 (the "Advisory").
1. If vacation time is part of the compensation package, the rights to it accrue just
like other wages.
2. Unless another accrual schedule is specified, vacation time accrues in the time
period in which the employee actually works.
3. If an employer terminates an employee with accrued vacation time, it must pay
equivalent wages on the day of termination, regardless of its policy.
The Decision puts to rest an argument that the Wage Act was only meant to
protect payment for vacation time that had been used, but not yet paid for, at the
time of termination. Although paid vacation is not required in Massachusetts, if it
is granted, accrued rights to it are protected as "earned wages."
The Court agrees with the illogical concept of "use it or lose it"
EDS asked a good question in its argument. If vacation pay is earned and
non-forfeitable, why does the Advisory permit vacation carryover policies, which
require employees to use accumulated vacation time by a certain period or to lose
it? If an employer can grant vacation under a condition which permits its loss
under a carryover policy, is vacation truly an earned and non-forfeitable wage? If a
"use it or lose it" condition is acceptable, doesn't that mean that a right to paid
vacation is not really earned pay at all, so why can't other conditions be added to
its grant?
The Court stretches for an answer, and can do no better than the philosophy in
the Advisory. Vacation pay is not forfeited, it says, if its "loss" occurs after a
reasonable period of time when vacation could have been used. (Query, would
that mean an employer can keep a paycheck if it is not picked up within a
reasonable period after it is earned?) To its credit, the Court does not use the
bizarre argument in the Advisory that a carryover is just a cap and not a forfeiture
at all. In short, the response to the EDS argument was not convincing. If vacation
can be granted subject to a "use it or lose it" condition, why can't it be granted
subject to the condition that it is forfeited if employment terminates?
Getting back to the practical, this part of the decision is welcome news, of course,
for employers. We'll take it. "Use it or lose it" vacation policies are confirmed in
Massachusetts.
One caveat. The Advisory requires that employees receive adequate notice of "use
it or lose it" features, and that employers "must ensure that employees have a
reasonable opportunity to use the accumulated vacation time within the time
limits." In thinly staffed work-places, that requirement to "ensure" reasonable
opportunity to use the forfeitable vacation time could be open to challenge.
Voluntary quits are not covered by this decision
The Decision involved rights of an employee who had been terminated in a job
reduction. As long as the Court was dispensing extra wisdom about carry-over
vacation policies, why didn't it answer the burning question? Does an employer
still have to pay if its vacation policy says that accrued vacation is forfeited if an
employee quits (or quits without adequate notice)?
The Advisory is unambiguous that the reason for termination does not matter:
Justice Botsford, who wrote the Decision, was not so sure she agreed with the
Advisory on this issue, and concluded with a warning that the Decision was not
intended to address the rights of a person who "leaves a job voluntarily." Her
concern on this issue emanates from the plain English of the Wage Act, which only
protects employees who are discharged from employment.
Does "discharge" mean "fired," or simply a departure from the employer's service
and a discharge from further service obligations? Considering the adamant
position of the Advisory, an employer takes a significant risk if it withholds vacation
pay from an employee who has terminated, regardless of the reason.
PTO policies
The Decision only dealt with vacation days. Many employers have developed PTO
policies and do not require an employee to differentiate between vacation,
sickness, and other reasons when taking time off. The Advisory warns that unless
the employer keeps records which differentiate the types of days, that they will
probably all be considered vacation days that must be reimbursed if employment
terminates.
A PTO policy can get an employer in trouble if it contains a generous allotment of
"any reason" days. Will all the unused days be considered vacation days if an
employee is terminated? Probably. An employer could take the position that only
x% of the days are for vacation, and that the system is an honor system if an
employee takes more. It could also provide that days will be considered "vacation
days" unless the employee advises to the contrary. That can be complicated
however, and works against the purpose of a PTO policy, which is not to require
differentiation of days. There is no fully satisfactory answer, and employers for
whom payment of vacation accruals is a problem may want to transition away from
a PTO policy.
What about ERISA?
Vacation plans are described as a type of ERISA welfare benefit plan. Is it possible
that ERISA applies, and that state law reimbursement requirements of the Wage
Act are preempted?
That was actually the view of the Massachusetts Supreme Court in 1989. It opined
that the Wage Act was not enforceable, because it established rules for
administering a vacation plan and ERISA does not allow state regulation of benefit
plans, unless in the context of regulating insurance policies. The US Supreme Court
threw a big curve ball and overruled our Supreme Court in Massachusetts v.
Morash, 490 U.S. 107 (1989). It decided that the Wage Act is really more of a
payroll statute, and that an employer who pays vacation pay is not sponsoring or
administering a "vacation plan" within the meaning of ERISA.
Well, that got the ERISA lawyers thinking. What if the employer set up a separate
trust, qualified it as a VEBA under IRC §501(c)(9), appointed a fiduciary, and made
all vacation payments from the trust? And what if that trust provided that
terminated employees do not get vacation pay?
Denny's Restaurants gave it a try. California, which has a statute similar to the
Wage Act, sued in state court. The federal courts (up to the US Supreme Court)
refused to take the case. Denny's also asked the US Department of Labor to rule
that its trust was an ERISA welfare benefit plan, which would have preempted
California law. The Department refused in Advisory Opinion 2004-08A:
Denny's finally gave up, and agreed to a $7.8 million settlement with California's
Division of Labor Standards Enforcement.
Conclusion
In Massachusetts, an employer does not have to provide paid vacation time.
Employers who do provide paid vacation time should realize they must pay the
accrued time to terminating employees, and a creative "policy" won't change the
obligation.
In the case of employees who quit, there is a slim chance that the MA courts may
decide there is no payment obligation, provided the policy clearly states that. The
Attorney General can be expected to resist, of course, and who wants to invite the
Attorney General to examine overtime, holiday pay practices, and every other
wage and hour issue that exists at even the most conscientious workplace?
As for ERISA, the Denny's case indicates that even if a single employer plan could
be developed that passed muster under federal standards, it would be a hard and
uncertain fight to deny accrued vacation pay to terminated employees.
The best solution may be for MA government to consider whether the Wage Act is
helping (or harming) employees and job creation. Why raise an obstacle for
employers that want to provide paid vacations, but simply do not want to pay the
cash equivalent to those who have left their employment? In tough times, will the
Wage Act encourage employers not to offer paid vacation at all?
________________________________________________________________
This article is provided as a courtesy and may not be relied upon as legal advice, or to
avoid taxes and penalties. Distribution to promote, market, or recommend any
arrangement or investment to avoid or evade taxes, including penalties, is expressly
forbidden. Any communication with the author as to its contents, does not, of itself,
create a lawyer-client relationship. Under the ethical rules applicable to lawyers in
some jurisdictions, this may be considered advertising.
return to theworkplace.biz
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