Massachusetts’ highest state court recently ruled that employers must pay terminated employees all unused vacation time, even if they have a written policy stating that vacation time is not earned and will not be paid out at termination. In its decision, Electronic Data Systems Corp. v. Attorney General, et al., the court held that failure to pay out unused vacation time at the time of an involuntary termination violated the Massachusetts Wage Act.

On April 8, 2005, Electronic Data Systems terminated its employee, Francis Tessicini, after 21 years of employment. Under EDS’s vacation policy, Tessicini was entitled to five weeks of paid vacation time in 2005, but had only taken one day that year. EDS’s written vacation policy provided that “vacation time is not earned and does not accrue. If [the employee] leaves EDS, whether voluntarily or involuntarily, [he] will not be paid for unused vacation time.” Relying on its policy, EDS refused to pay Tessicini for the unused vacation time.

The Massachusetts Wage Act requires all “wages” to be paid in full at the time of termination, and further states that employers cannot exempt themselves from the law by a “special contract with an employee or by any other means.” The definition of “wages” includes all holiday or vacation payments due to an employee under any oral or written agreement. EDS argued that because its policy stated that vacation time was not earned and would not be paid out upon termination, it was not “due,” and thus did not qualify as “wages.”

The court disagreed. Relying on a 1999 advisory issued by the Massachusetts Attorney General stating that vacation time vests at the time the employee’s services are rendered, it held that the vacation time was “due” at the time of termination and must be paid, notwithstanding the company’s policy language to the contrary. Importantly, the court did clarify that 1) an employer does not have to provide vacation time; 2) an employer can continue to have “use it or lose it” vacation policies; and 3) it was not deciding whether vacation time under a policy like EDS’s would have to be paid out if the employee voluntarily separated from the employer (though the Attorney General’s advisory relied on in the decision takes the position that it does). However, if an employee is entitled to vacation time under the employer’s policy, he or she must be paid for that time if he or she is involuntarily terminated, regardless of the language of the policy.

What This Means For You:  

Claims for unpaid wages (including vacation time) can be costly for employers, as the Massachusetts Wage Act carries substantial penalties in the form of mandatory treble damages and attorneys’ fees. We offer the following practical suggestions:

  • Make sure your company’s vacation policy includes language stating that vacation time will accrue on a pro-rated basis over the course of the year.
  • Consider adding a “use it or lose it” provision to your vacation policy, if you don’t already have one. This can be a valuable way of preventing the build-up of substantial accrued vacation days that have to be paid out at the time of termination.
  • If you have sick policies or other paid leave policies aside from vacation, be sure they state that such time will not be paid out upon termination of employment. Consider including “use it or lose it” provisions in these policies as well.  
  • If you provide severance pay to terminated employees in exchange for a release of claims, be sure the severance agreement includes a statement that all earned vacation time has been paid to the employee, and expressly reference “vacation pay” in your release language.  
  • Note that the laws on payment of vacation time vary from state to state, and this decision applies only to Massachusetts employees. For employees in other states, you are advised to consult with employment counsel to ensure your policies and severance agreements comply with all applicable state laws.