Massachusetts Supreme Judicial Court Decision Requires Payment of Vacation Time Upon Involuntary Termination of Employment
On June 11, 2009, the Massachusetts Supreme Judicial Court (SJC) concluded in Electronic Data Systems Corporation v. Attorney General that the Massachusetts Wage Act requires employers to pay accrued vacation time to involuntarily terminated employees. The SJC’s decision highlights the importance of maintaining a clear and comprehensive vacation policy that complies with the Wage Act.
Background and SJC Decision
Francis Tessicini worked at Electronic Data Systems Corporation (EDS) and its predecessor companies for 21 years. When EDS eliminated his position, EDS did not pay him accrued vacation. EDS relied on its vacation policy that stated, in relevant part, that “vacation time is not earned and does not accrue. If you leave EDS, whether voluntarily or involuntarily, you will not be paid for unused vacation time (unless otherwise required by state law).” Tessicini alleged that EDS’s failure to pay unused vacation time constituted a violation of the Wage Act.
Tessicini filed a wage complaint with the Office of the Attorney General, which concluded that vacation pay had been wrongfully withheld. EDS appealed the decision to the Superior Court, which affirmed the Office of the Attorney General’s determination. EDS then appealed to the SJC. On appeal, the SJC concluded that the Wage Act required that EDS pay Tessicini his accrued vacation. The SJC concluded that an employer may not circumvent this obligation by implementing a policy that states that an involuntarily terminated employee is not entitled to payment of vacation time.
Wage Act and AG Advisory on Vacation Policies
In reaching its decision, the SJC analyzed the Wage Act (Massachusetts General Laws Chapter 149, Section 148) and a 1999 Attorney General Advisory concerning vacation policies.
The Wage Act states, in relevant part, that “any employee discharged from … employment shall be paid in full on the day of his discharge.” The Wage Act further provides that “the word ‘wages’ shall include any holiday or vacation payments due an employee under an oral or written agreement.” The Wage Act states that “no person shall by a special contract with an employee or by any other means exempt himself from this section.”
In 1999, the Massachusetts Office of the Attorney General issued an advisory concerning vacation policies (AG Advisory). The AG Advisory states, in relevant part, “Employers who choose to provide paid vacation to their employees must treat those payments like any other wages under [the Wage Act]. Like wages, the vacation time promised to an employee is compensation for services which vests as the employee’s services are rendered. Upon separation from employment, employees must be compensated by their employers for vacation time earned ‘under an oral or written agreement.’” The AG Advisory also states that “an employer may not enter into an agreement with an employee under which the employee forfeits earned wages, including vacation payments . . . . Employees who have performed work and leave or are fired, whether for cause or not, are entitled to pay for all the time worked up to the termination of their employment, including any earned, unused vacation time payments.” In Electronic Data Systems, the SJC stated that the Attorney General’s interpretation of the wage and hour laws “is entitled to substantial deference.”
Practical Steps to the Reduce Risk of Violation of the Wage Act
The SJC’s decision underscores the importance of maintaining a clear and comprehensive vacation policy. As a general matter, an employer’s vacation policy should:
- be provided to all employees
- be clear about how vacation time is accrued and whether vacation time may be carried over from year to year
- set forth other conditions or limitations on the accrual or use of vacation time
Further, with respect to modifying an existing vacation policy, an employer must consider carefully the possible effects on an employee’s accrued vacation time. As a general rule, the employer should provide notice to employees of such modifications that may affect accrued vacation time and provide employees a reasonable opportunity to use accrued time before such changes are implemented. Because of the potential Wage Act implications, an employer should seek the advice of counsel before implementing such changes to an existing vacation policy.
The issue of payment of vacation time takes on heightened importance as employers continue to implement reductions-in-force. Employers managing reductions-in-force must calculate and pay accrued vacation time to laid-off employees. In addition to payment of vacation time, employers managing a reduction-in-force must also address, among other wage issues, the final payment of other wages (which must be paid on the day of termination) and severance pay, if any.
The failure to pay accrued vacation may have serious financial consequences for the employer because the Wage Act authorizes significant damages. Under the Wage Act, a prevailing plaintiff may recover the amount of the withheld wages, interest, reasonable attorney’s fees and costs, and treble damages. Effective in 2008, the award of treble damages is mandatory for a violation of the Wage Act. An employer does not have a “good faith” defense to non-payment of wages, including the failure to pay accrued vacation time.
Many Massachusetts employers have been following the AG Advisory and paying accrued vacation to employees who were involuntarily terminated. The SJC’s recent decision confirms the propriety of that practice. Employers that have not paid accrued vacation upon involuntary termination should change their practices and policies to comply with the SJC’s decision. Regardless of an employer’s past practice, this case highlights the need for employers to review their vacation policies and to take steps necessary to minimize the risk of violating the Wage Act.