Employers Must Pay Unused Vacation Time to Discharged Employees

In Electronic Data Systems v. Attorney General, the SJC recently held that the failure to pay unused vacation time to involuntarily terminated employees violates Massachusetts General Laws ch. 149, § 148 (Wage Act). The Wage Act requires employers to pay all wages that are due to an employee on the day of his or her discharge. The Wage Act further provides that “wages” include “vacation payments due an employee under an oral or written agreement” but prohibits employers from contracting around the Wage Act’s requirements by entering into “special contracts” with employees.

In this case, EDS terminated an employee and, invoking language in its vacation policy, which stated that it would not pay any employee leaving the company on a voluntary or involuntary basis for unused vacation time, declined to pay the employee for his unused vacation time. The employee filed a complaint with the Massachusetts Attorney General’s fair labor division, and the Attorney General cited EDS for failure to make timely payment of wages. EDS appealed the citation.

On appeal, EDS argued that because “vacation payments” under the Wage Act’s definition of “wages” are only those due under the terms of an employment agreement and its policy explicitly provided that employees leaving EDS would not be paid for unused vacation time, no payment was due the employee “under a written agreement.” The Attorney General, in turn, argued that once the employee had accumulated vacation time under the vacation pay policy, it became due under the definition of “wages,” and therefore constituted “wages earned,” which the Wage Act required EDS to pay on the day of the employee’s discharge. The Attorney General considered the portion of EDS’s vacation policy denying payment for unused vacation time to constitute an unenforceable “special contract.”

The SJC agreed with the Attorney General. The SJC first held that vacation pay was in fact “earned” under the policy, despite the policy’s language to the contrary, because employees were eligible for vacation based upon the number of hours they worked per week and their years of service. The SJC then stated that where an employer provides for vacation in an employment agreement or policy, that vacation becomes due to the employee for Wage Act purposes day by day as the employee works. The Court noted that vacation may be “lost by disuse,” but vacation earned pursuant to an employer’s policy may not be forfeited at termination.

With this case, the SJC left open many questions regarding the application of the Wage Act to vacation pay policies. For instance, the case does not address payment of unused vacation upon voluntary termination. Nor does it discuss the circumstances under which vacation may be forfeited pursuant to a “use-it-or-lose-it” policy. The case makes clear, however, that the Wage Act requires employers to pay discharged employees for any accrued, unused vacation.