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August 12, 2009
Was Vacation Pay Due Upon Termination?
Does the Massachusetts Wage Act require employers to pay accrued but unused vacation pay at termination? The state’s Supreme Judicial Court recently considered this issue.

What happened. “Tony” was a 21-year veteran employee of Electronic Data Systems Corporation (EDS) when the company eliminated his position. At the time, Tony had used only 1 vacation day out the 5 weeks of paid vacation he was entitled to under the company’s policy. In compliance with its policy that vacation was not “earned,” EDS did not pay Tony for his unused vacation. Tony then filed a complaint with the Attorney General’s labor division, claiming that EDS owed him for unused vacation under the state’s Wage Act. The Attorney General agreed, ordering EDS to pay the vacation accruals plus a 200% penalty. EDS appealed.

What the court said. The court first looked to the language of the Act. It states that discharged employees must be paid wages earned on the day of discharge, and it defines wages to “include any holiday or vacation payment due an employee under an oral or written agreement.” The Act prohibits employers from entering “special contracts” with employees to avoid their compensation obligations.

The parties focused their arguments on whether vacation pay was “due” under the Act. EDS argued that by the terms of its vacation policy, no vacation pay was “due” to Tony upon his termination. However, the Attorney General argued that once Tony had accumulated vacation time under EDS’ policy, it became “due.” Moreover, the Attorney General contended that EDS’ vacation policy to the contrary constituted a prohibited “special contract.”

The court ruled in favor of Tony. It adopted the reasoning of a 1999 Attorney General Advisory Opinion stating that paid vacation time promised to an employee is compensation for services rendered and vests as the services are rendered. Therefore, upon discharge from employment, employees must be paid for vacation time earned under a vacation policy.

The court noted that its holding would not prohibit use-it-or-lose-it vacation policies. As the Attorney General stated, such policies are permissible if: the employer provides adequate notice to employees; and employees have a reasonable opportunity to use the accumulated vacation within the time period set by the employer.

The court did not address whether accrued vacation time must be paid to employees who voluntarily quit. Therefore, that issue remains unresolved. Electronic Data Systems Corp. v. Attorney General, Massachusetts Supreme Judicial Court, No. SJC-10260 (2009).

Point to remember. In Massachusetts, employers do not have to provide paid vacation. However, if they do, accrued vacation time must be paid out to terminated employees.

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