The state’s highest court recently ruled that an employee who earned and was entitled to paid vacation time under the terms of his employment agreement and who was involuntarily discharged was entitled to payment for his unused vacation time. According to the Massachusetts Supreme Judicial Court, while state law does not require employers to provide employees with paid vacation, when the employer does so, an employee’s entitlement is another form of compensation, which is due upon discharge. Electronic Data Systems Corp. v. Attorney General, No. SJC-10260, Massachusetts Supreme Judicial Court (June 11, 2009).

Factual Background

On April 8, 2005, Electronic Data Systems Corporation (EDS) eliminated Francis Tessicini’s position. Although Tessicini had used only one day of vacation by this date, EDS did not pay him for his unused vacation time on termination. EDS’s written vacation policy specifies that employees accumulate paid vacation time based on the number of calendar years he or she has worked for EDS. In addition, the policy stated that “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).”

On May 5, 2005, Tessicini filed a complaint with the Attorney General’s Fair Labor Division, arguing that EDS owed him vacation payments under the Massachusetts Payment of Wages Act (the “Wage Act”). The Attorney General issued a citation that required payment of $1,799.70 to Tessicini and assessed a $3,490 civil penalty against EDS for intentional failure to make timely payment of wages. EDS appealed to the Division of Administrative Law Appeals (DALA), which affirmed the citation but calculated the payment owed to Tessicini as $1,970.95. A Superior Court judge affirmed DALA’s opinion and EDS appealed.

Legal Analysis
The Wage Act states that “wages,” defined to include “any holiday or vacation payments due an employee under an oral or written agreement,” must be paid in full to discharged employees on the day of discharge. EDS argued that an employment agreement may lawfully restrict or limit an employee’s right to vacation payments since “vacation payments” under the Act are payments “due” under the terms of an oral or written employment agreement. Since under their policy employees who leave EDS are not entitled to payment for unused vacation time, EDS argued, Tessicini was not due vacation payments upon discharge.

In deciding the issue, the court first examined EDS’s vacation policy. According to the court, the policy contradicts itself on the issue of whether vacation time is earned. The court found, however, that since an employee is eligible for vacation pay based on the number of hours or years the employee “ha[s] worked,” paid vacation at EDS is earned.

The court next considered the Attorney General-issued Advisory 99/1 regarding the Wage Act’s treatment of vacation policies. According to this Advisory, employers must treat paid vacation payments the same as wages; thus, “an employer may not enter into an agreement with an employee under which the employee forfeits earned wages, including vacation payments.” The Advisory also clarified that employees are entitled to pay (including earned and unused vacation pay) for all the time worked up to their termination.

Giving deference to the Attorney General’s interpretation of the Wage Act, the court concluded that where an employee is entitled to vacation pay under the terms of an employment agreement, the entitlement is another form of compensation, which must be paid in full when the employee is discharged. In arriving at this conclusion, the court rejected EDS’s argument that the provision of the Wage Act dealing with vacation payments as “wages” applies only where an employer violates its own policy. According to the court, “the Wage Act would have little value if employers could exempt themselves simply by drafting contracts that placed compensation outside its bounds – as EDS attempted to do, when it stated that ‘vacation time is not earned.’” The court, therefore, affirmed the judgment of the Superior Court.

Practical Impact

According to Neil McKittrick, a shareholder in Ogletree Deakins’ Boston office: “The importance of the EDS case from the perspective of employers is that it confirms that employees who have accrued, unused vacation at the time of an involuntary termination are entitled to be paid for that vacation time on the day of termination under the Wage Act. We have advised our clients to do this for years, but in the absence of an appellate court ruling on the subject, there were apparently employers, such as EDS, that operated under a different interpretation of the statute. The Supreme Judicial Court in EDS did not address the question whether employees who voluntarily terminate their employment are similarly entitled to receive payment for their accrued and unused vacation time, but there is no reason that those employees who resign should be treated differently under the Wage Act in connection with vacation pay they have earned.”

Note: This article was published in the August 2009 issue of the Massachusetts eAuthority.

Browse More Insights

Practice Group

Employee Benefits and Executive Compensation

Ogletree Deakins has one of the largest teams of employee benefits and executive compensation practitioners in the United States. As part of a firm that focuses on labor and employment law, our Employee Benefits Practice Group has a special ability to relate technical experience to the client’s “big picture” issues.

Learn more
Practice Group

Employment Law

Ogletree Deakins’ employment lawyers are experienced in all aspects of employment law, from day-to-day advice to complex employment litigation.

Learn more

Sign up to receive emails about new developments and upcoming programs.

Sign Up Now