Employers are wise to evaluate their paid leave policies and practices to ensure that they are consistent with the decision in Electronic Data Systems v. Attorney General.

In June 2009, the Massachusetts Supreme Judicial Court held that an employer could not rely on its vacation policy to avoid paying involuntarily terminated employees for unused vacation time. The decision confirmed a long-standing interpretation of the Wage Act by the Massachusetts Attorney General, and serves as a lesson to employers who mistakenly believe they can avoid paying accrued but unused vacation time upon termination merely by creating a policy that purports to give them authority to do just that. As the highest court in Massachusetts has now made clear, employers must include accrued but unused vacation time in the final paychecks of Massachusetts employees who are involuntarily terminated.

In Electronic Data Systems v. Attorney General, No. SJC 10260 (Mass. June 11, 2009), the employer’s vacation policy stated “vacation time is not earned and does not accrue. If you leave . . . whether voluntarily or involuntarily, you will not be paid for unused vacation time (unless otherwise required by state law).” The employer relied on its policy and refused to include vacation pay in the final paycheck of an involuntarily terminated employee. The employee complained to the Attorney General’s Fair Business Practices Division, which ordered Electronic Data Systems (EDS) to pay the vacation time plus a civil penalty. EDS then challenged the order in Superior Court.

The Superior Court upheld the Attorney General’s order, finding that EDS had violated the Wage Act, which provides that “any employee discharged . . . shall be paid in full on the day of his discharge . . . ‘wages’ . . . includ[ing] any holiday or vacation payments due an employee under an oral or written agreement.” (G.L. c. 149, § 148) The Supreme Judicial Court then granted an application for direct appellate review.

EDS argued on appeal that, among other things, no vacation payment had ever been due to the former employee because its vacation policy makes clear that vacation time is not earned and that departing employees (whether leaving on a voluntary or involuntary basis) would not be paid for unused vacation time. The Attorney General argued that regardless of what the policy said, the former employee’s vacation payments had become due as soon as the vacation time accumulated, so the payments were wages that should have been paid upon termination. The court agreed with the Attorney General.

The court rejected EDS’s claim that vacation time was not earned and found that while the employer did state in one section of the policy that the time was not earned, other sections indicated that the time was, in fact, earned. For example, the policy provided that employees were “eligible” for “vacation pay” based on number of hours worked each week and years of service. Based on the language and structure of the policy, the court concluded that “the clear import of these provisions is that paid vacation at EDS is earned” despite the policy stating otherwise.

The court also gave substantial deference to the Attorney General’s advisory opinion 99/1, which interprets the Wage Act to prohibit employers from, among other things, entering into agreements that cause employees to forfeit earned wages, including earned vacation, upon termination.

The Wage Act does not require employers to provide their employees with paid vacation. As the advisory reflects, however, the Attorney General interprets the Wage Act to mean that when an employer does provide for paid vacation and an employee is entitled to paid vacation under the terms of an employment agreement, the entitlement is another form of compensation, and becomes “due” day by day as the employee performs his or her duties. It can be lost by disuse, but if an employee is “discharged from … employment,” the value of the vacation benefit earned up to that date and that would still be available if the employee remained at the job must be “paid in full on the day of his discharge.”

The court concluded that the Attorney General’s interpretation of the Wage Act is reasonable and, therefore, “we defer to her interpretation.”

While the court affirmed the judgment against EDS, it did not decide whether the same rule applies in cases of a voluntarily termination because the question was not before them on appeal. Given the basis for the ruling, however, the court would likely hold the same requirement does apply regardless of whether the employee is terminated voluntarily or involuntarily. In all events, employers are wise to evaluate their paid leave policies and practices to ensure that they are consistent with this decision.