On June 11, 2009, the Massachusetts Supreme Judicial Court (SJC) issued its long-awaited decision in Electronic Data Systems Corporation v. Attorney General, holding an employer violates the Massachusetts Wage Act when that employer's policy requires terminated employees to forfeit accrued, unused vacation time at the time of discharge.

In its holding, the SJC explicitly relied on the Massachusetts Attorney General's interpretation of the Wage Act. The SJC, however, did not address whether an employer could require an employee, who quits voluntarily, to forfeit accrued, unused vacation time.

The Massachusetts Wage Act, Mass. Gen. Laws ch. 149, § 148, provides that "vacation payments due to an employee under an oral or written agreement" constitute "wages" that must be paid at the time of termination. Further, the Wage Act prohibits any "special contract with an employee" that would exempt the employee from the provisions of the Massachusetts Wage Act. In Electronic Data Systems Corporation, the employer (EDS) had a policy that stated, in part, "vacation time is not earned and does not accrue." The policy, however, also provided that employees' eligibility for vacation was based on the number of full calendar years worked at the company. In addition, EDS's policy provided that the company would not pay terminating employees for any accrued, unused vacation, regardless of whether the employee left voluntarily or involuntarily.

The SJC rejected EDS's argument that vacation time was not earned and therefore did not constitute wages, holding that the "clear import" of EDS's policy was that vacation time was earned based on employees' lengths of service. After determining that EDS employees "earned" their vacation time, the Court concluded that employees' accrued, unused vacation constituted wages pursuant to the Massachusetts Wage Act, and therefore must be paid upon termination of employment.

In reaching its decision, the SJC gave substantial deference to the Attorney General's Advisory 99/1 on Vacation Policies, which interprets the Wage Act. That Advisory provides that vacation time an employer promises to an employee vests as the employee renders services for the employer and must be paid out upon the employee's separation from employment. The Advisory explicitly prohibits employer policies that require forfeiture of earned vacation time upon termination of employment. The Court found this interpretation by the Attorney General, as the agency responsible for enforcing the Wage Act, reasonable.

Although the Court left open the issue of whether employees forfeit vacation pay when they voluntarily leave their employment, the Court's deference to the Attorney General's Advisory suggests that the outcome under those facts is likely to be the same. Moreover, this decision has broader implications beyond the payment of vacation time. Given the Court's willingness to defer to the Attorney General's interpretation of the payment of vacation time under the Massachusetts Wage Act, we can expect it also will give substantial deference to the Attorney General's views on the payment of commissions and other aspects of the Wage Act.

In light of this decision, Massachusetts employers should review and revise, if necessary, their vacation policies and practices to ensure compliance with the SJC's decision.