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Legal Updates

Massachusetts High Court: Pay All Accrued But Unused Vacation Time

Employees who are involuntarily discharged must be paid for all accrued but unused vacation time on the discharge date, regardless of whether the employer has a policy to the contrary, the Massachusetts Supreme Judicial Court (“SJC”) has ruled.  Employers must immediately comply with this ruling, which clarifies a critical yet ambiguous portion of the Massachusetts Wage Act.

In Electronic Data Systems Corporation v. Attorney General, the SJC addressed whether an employer’s written vacation policy, which did not provide for payment of accrued but unused vacation time upon an employee’s discharge, violated Mass. Gen. Laws ch. 149, § 148 (the “Wage Act”).

The Wage Act states that “any employee discharged from such employment shall be paid in full on the day of his discharge.”  It defines wages to include “any holiday or vacation payments due an employee under an oral or written agreement.”  Significantly, the statute also instructs that “[n]o person shall by a special contract with an employee or by any other means exempt himself from this section.”

The employer, Electronic Data Systems Corporation (“EDS”), argued that vacation payments were not due to a discharged employee under a written agreement – and therefore were not required to be paid under the Wage Act – because its written vacation policy stated:  “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).”

In rejecting EDS’s argument, the SJC relied upon a 1999 Advisory of the Massachusetts Attorney General (the “Advisory”).  The Advisory requires the payment of accrued but unused vacation time upon discharge and treats policies like EDS’s as prohibited “special contracts.”  Because the Attorney General’s office is responsible for enforcing the Wage Act, the SJC explained, its Advisory is entitled to “substantial deference.”  Finding the Advisory to be reasonable and not inconsistent with the plain language of the Wage Act, the SJC deferred to it.

The SJC did not reach the question of whether an employee who leaves a job voluntarily must be paid for accrued but unused vacation time.  However, the Advisory instructs, “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.”

This case began when EDS refused to pay employee Francis Tessicini his accrued but unpaid vacation time upon eliminating his position in April 2005.  Tessicini filed a wage complaint with the Attorney General’s office, which issued a citation requiring EDS to pay a civil penalty.  EDS appealed to the Division of Administrative Law Appeals (“DALA”), which upheld the citation, and then sought review of DALA’s order by the Superior Court, which affirmed DALA’s decision.  EDS appealed the Superior Court’s decision to the SJC, which granted direct appellate review.

Electronic Data Systems provides an important reminder to Massachusetts employers not to make policy decisions until after reviewing all applicable sources of legal authority.  In this regard, while EDS’s interpretation of the Wage Act itself was plausible, it was inconsistent with an administrative advisory that interpreted the Wage Act differently and that was entitled to “substantial deference” by the courts.

Achieving full compliance with the Wage Act is particularly important because this law entitles prevailing plaintiffs to mandatory treble damages plus attorneys’ fees for proven violations.  This is so even in the case of unintentional violations by employers acting in good faith.  Accordingly, we encourage employers to review their vacation policies, update their employee handbooks, and provide corresponding training to their supervisors and managers so as to ensure adherence to Electronic Data Systems.

Multi-state employers are encouraged to review all applicable vacation laws and guidance to ensure compliance in all relevant states.

If you have questions about the implications of this case or pay practices generally, please do not hesitate to contact us.