“When an employee has earned or accrued his or her leave in exchange for work, an employee has a right to be compensated for unused leave upon the termination of his or her employment regardless of the employer’s policy or language in the employee handbook.”

These words, posted recently on the website of Maryland’s Department of Labor, Licensing and Regulation (“DLLR”) without notice or opportunity to comment, have generated keen interest. To the casual reader, the guidance appears to be a simple statement explaining when terminated employees are entitled to pay for unused leave under Maryland law. In actuality, the guidance may have caused more confusion because it has been represented to require payment for unused vacation leave in all circumstances. This interpretation, regardless of the fact that it may represent the DLLR’s position, misreads the “guidance” and does not reflect Maryland law.

What Maryland Law Governs Leave Payment?

The Maryland Wage Payment and Collection Law, Md. Code Ann., Lab. & Empl., §3-501 to 3-509 (“MWPCL”), governs the circumstances under which a Maryland employee must be paid for unused leave upon separation from employment. The MWPCL requires that employers pay employees all wages earned by the employee at regular paydays set by the employer and that terminated employees be paid wages owed them not later than the next regularly scheduled payday. The key word is “wages”: MWPCL defines “wages” broadly as all “compensation” that is due for employment and specifically includes bonuses, commissions, fringe benefits, or other remuneration “promised for service.” Id. §3-501 (c).

As is apparent, compensation is not restricted just to an hourly wage and if a bonus, commission or fringe benefit such as leave has been promised as part of the compensation for service, the employee will be entitled to its payment as wages under the MWPCL on termination. Stevenson v. Branch Banking and Trust Corp., 159 Md. App. 620 (2004) (quoting Whiting-Turner Contracting Co. v. Fitzpatrick, 366 Md. 295 (2001), 366 Md. at 304-05); Medex v. McCabe, 372 Md. 28 (2002). If the benefit has not been promised for service, it will not be wages that must be paid on termination. Id.

Medex and Whiting-Turner establish two key points for Maryland employers. First, they highlight that the terms of the employment arrangement are crucial to a finding that a benefit has been promised in exchange for work. Employers are permitted to define what is necessary to earn the wage. If these conditions are not met, the benefit is not earned and is not a wage required to be paid on termination. Second, if a benefit is “earned” by the employee, it cannot be forfeited by imposition of a condition unrelated to the benefit’s earning, such as a requirement to still be employed at the time of payment. In other words, under the MWPCL, entitlement to payment of a “wage” cannot be conditioned on continued employment at the time of payment.1

Two very recent cases illuminate these points. Catapult Technology, Ltd. v. Wolfe (August 2007), an unpublished decision of the Court of Special Appeals, passed judgment on whether an employer could refuse to pay earned vacation pay to employees who quit without proper notice. There was no dispute that the benefit was earned: the employer’s handbook expressly stated that employees “earned” and “accrued” vacation leave according to a schedule during each pay period in which they worked. The Court held that the unused vacation pay constituted wages payable under the MWPCL. The significance of the decision lies in the Court’s analysis of the employer’s termination notice policy, which resulted in the forfeiture of unused leave pay for inadequate notice. Unlike the conclusion in Rhoads, the Court determined that a personnel policy that requires an employee to forfeit wages earned violates the MWPCL. In other words, an employee’s failure to give proper notice will not entitle an employer not to pay her the wages, including leave and bonuses, she earned before termination.

In a recent published case, Hoffeld v. Shepherd Electric Co., 176 Md. App. 183 (2007), the Court of Special Appeals examined when a commission is earned under the MWPCL. Under the employer’s commission plan, a commission did not become payable until the material sold to the customer was both shipped and invoiced. The employee contended that the commission was earned on the purchase order date. The Court ruled that an employer is generally free to set the terms under which an employee earns a commission. Because there was no dispute the employee had not closed the orders under the policy, the Court found that the employee had not earned the commission under the MWPCL.2

What Is A Maryland Employer To Do?

The DLLR’s “new” guidance does not offer any especially helpful guidance to Maryland employers. First, by stating that employees must be paid for earned unused leave regardless of the employer’s policy, the guidance seems intended to adopt the holding of the Catapult decision as law. That decision, however, is not binding law because it is unpublished. Second, and more critically, the new guidance does not address the central issue – whether the leave is “earned” because it is promised in return for services. The guidance applies only to leave “earned” in return for work and does not assist in determining whether the benefit is earned. As Hoffeld makes clear, this is the dispositive issue.

While the DLLR guidance is not illuminating, cases such as Medex, Whiting-Turner, Catapult, and Hoffeld can be helpful. These cases make the following points:

  • To be a wage, the benefit (bonus, leave, severance, etc.) must have been promised in return for service. If it is not, if it is discretionary or is provided in return for something other than work, it is not a wage.
  • The terms of the promise are very important. It is permissible to require the individual to be employed for a specific period, such as for two years or for the entire bonus period.
  • Conditions that are unrelated to the earning of the benefit, such as providing notice, are likely to be found ineffective.
  • Less clearly, the recent cases call into question whether an employer can have a policy that results in a forfeiture of otherwise earned vacation leave. Catapult, while unpublished, expressly states that an employer may not. This is the position reflected in the DLLR’s “new” guidance.

Whether a policy results in forfeiture does not, of course, address the issue of whether the benefit is a wage, that is, whether it was promised in exchange for remuneration – or whether the conditions for its earning were satisfied. Under current case law, it is possible to provide benefits that are not wages and that are not payable on termination.

In order for benefits not to become wages under the MWPCL, however, the benefit must not be promised, overtly or implicitly, in exchange for service. Employers who do not intend for such benefits to be earned or paid on termination should take great care to ensure that employees understand that point. The fact that such benefits are granted or are discretionary and cannot be earned should be pointed out in offer letters, in handbooks, in employment contracts, and in personnel policies. Similarly, employers should take care not to structure the benefit so that it looks as though it is being earned or is a subterfuge to evade the law. Offering different levels of leave based on seniority or on a pro-rata basis for part-time employees may be argued to constitute a benefit provided in exchange for service. For example, the Court in Hoffeld observed that the leave benefit was accrued in direct proportion to the service of the employee. Similarly, the employer reserved the right to deduct from unpaid leave upon termination, a policy that that, in the court’s view, suggested the benefit was earned.

Cautious Maryland employers may not wish to test the waters in this area or to risk upsetting employees; thus, they may choose to follow the more conservative route of simply paying employees for unused vacation. Employers electing to do so may nevertheless wish to consider mechanisms to limit potential payouts, such as caps on the amount of leave that can be earned.

Finally, those employers who do not operate exclusively in the state of Maryland need to be aware of similar legal controversies surrounding the payout of vacation and other “earned” leave in other states. Though beyond the scope of this article, cutting off employee entitlements to leave should be carefully evaluated so as to remain in accordance with applicable state law.