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Co-Author, Payout for Vacation Upon Termination of Employment

Pappas, Nicholas J.Klein, Jeffrey S.

(February 7, 2005, New York Law Journal)

Employers frequently face claims by former employees for vacation pay that was earned but unused upon termination of employment. The state of the law varies widely in different jurisdictions as to whether former employees are entitled to receive such payments. Consequently employers should become familiar with the varying rules governing vacation pay so as to ensure that their vacation polices comply with applicable law.

Specifically, employers should familiarize themselves with the wage payment laws in each state in which they have employees to determine whether earned but unused vacation time must be paid out upon termination of employment, and the timing of such payment. This article will survey the case law of New York and examine how it differs from the law in other jurisdictions. This article also will provide guidance to employers who wish to establish policies that require the forfeiture of vacation pay upon termination.

New York law

One of the most important issues frequently addressed by the courts is the statutory definition of the term “wages” and whether that term encompasses earned but unused vacation time.

In New York, Article Six of the Labor Law sets forth a comprehensive set of statutory provisions, which protect the rights of employees to be paid their wages. For example, Labor Law 191(3) requires that upon termination of employment, employers must pay employees their “wages not later than the regular pay day for the pay period during which the termination occurred....” Under 190(1), “wages” also includes “benefits or wage supplements as defined in section one hundred ninety-eight-c of this article, except for the purposes of sections one hundred ninety-one and one hundred ninety-two of this article.” Section 198-c(2) provides: “As used in this section, the term ‘benefits or wage supplements’ includes . . . vacation, separation or holiday pay.”

Section 198-c does not apply to “any person in a bona fide executive, administrative, or professional capacity whose earnings are in excess of six hundred dollars a week.” Additionally, section 191 of the Labor Law is somewhat confined in that, with the exception of manual workers, “all other categories of employees entitled to statutory protection under § 191 are limited by definitional exclusions of one form or another for employees serving in an executive, managerial or administrative capacity.” Gottlieb v. Kenneth D. Laub & Co., 605 N.Y.S.2d 213 (1st Dept. 1993).

The seminal case in New York addressing the issue of payment of accrued vacation time is In the Matter of Glenville Gage Co., Inc. v. Industrial Board of Appeals of the State of New York, Dep’t of Labor, 421 N.Y.S.2d 408 (3d Dept. 1979). There, five former employees of defendant left their employment after being eligible for vacation, but before the date actually set for the vacation period. The employees were denied any payment for vacation which had been unpaid as of the date the employment ended. The former employees filed claims for unpaid wage supplements with the Department of Labor, and the Industrial Commissioner ordered the petitioner to comply with section 198-c of the Labor Law by paying the vacation pay claimed. The petitioner appealed to the respondent Industrial Board of Appeals. The board found that requiring employees to “forfeit” vacation pay or time unless employed at vacation periods is against public policy and void and on that basis it upheld the order to comply. Defendant then commenced a proceeding pursuant to CPLR article 78 to review the determination. Special Term found that vacation benefits are analogous to bonuses, which are subject to section 191(1)(c) of the Labor Law and found that the forfeiture “frustrates the object of section 198-c and is thus void.” Matter of Glenville Gage Co. v Industrial Bd. of Appeals of State of N. Y., Dept of Labor, 95 Misc 2d 648, 650 (N.Y.Sup. Apr 21, 1978).

Upon appeal, the Supreme Court examined the statutory scheme outlined above and determined that it was the legislative intent that “vacation pay” was not included in “wages” for the purpose of the mandatory provisions of section 191 as to the time of payment of wages upon the termination of employment. The Glenville court, in disagreeing with the public policy argument advanced below, further stated that “the requirements of section 191 of the Labor Law were excepted from agreements as to the payment of vacation pay upon termination of employment.” With respect to section 198-c, the court stated that an employer is only required to abide by the terms of his agreement to provide benefits.

The Glenville decision suggests that employers in New York are free to establish a policy whereby employees forfeit accrued but unused vacation in the event of termination of employment. Grisetti v. Super Value, Inc., 736 N.Y.S.2d 835 (N.Y.Sup.App.Term 2001). Cf. Spencer v. Christ Church Day Care Center Inc., 720 N.Y.S.2d 633 (3d Dept. 2001). Although the New York courts do require that the employee have knowledge or notice of the employer’s vacation rules in order to enforce them, e.g., Glenville, 70 A.D.2d at 287, that requirement may be satisfied in a variety of ways. For example in DeVitai v. Rand McNally & Co., 256 N.Y.S.2d 9 (N.Y.Just.Ct. 1965), the court found “that plaintiff did not have knowledge or notice of these rules [vacation] since they were not told to him nor were they posted in a convenient place or published so as to place him on notice of them.” By contrast, the Glenville court, citing the DeVitai opinion found that the evidence established sufficient notice on the part of the employees due to their “general knowledge of the practice of the employer with reference to vacation pay.” Glenville, 70 A.D.2d at 286.

Other Jurisdictions

Certain states require by statute that, with the exception of employees covered by collective bargaining agreements, where an employer provides for paid vacation, it must compensate the employee for earned but unused vacation when the employee is discharged. These state statutes also prohibit employment contracts which provide for a forfeiture of earned or vested vacation pay upon termination of employment. An analysis of two seminal cases from California and Illinois demonstrates a sharp contrast with New York Labor Law.

In Suastez v. Plastic Dress-Up Co., 647 P.2d 122, 31 Cal.3d 774 (Cal. 1982), the company’s vacation policy provided that each employee was entitled to between one and four weeks of paid vacation annually, depending on the length of his or her employment. An employee did not become eligible for a paid vacation under the company’s policy until the anniversary of his or her employment. Thus, Plastic Dress-Up routinely refused to pay vacation credits to anyone whose employment ended before that anniversary date. Suastez, 31 Cal.3d at 776. In Suastez, plaintiff received vacation pay in 1974, 1975 and 1976, but took no time off. In October of 1977, immediately after his anniversary date, plaintiff took a 3-week paid vacation. Midweek in July of 1978, plaintiff was discharged. At that time, plaintiff requested a pro rata share of his vacation pay for the period from his anniversary date (Oct. 16, 1977) until his last day of work (July 20, 1978). Plastic Dress-Up refused to pay any pro rata vacation benefits.

The company argued that under its vacation policy, employees were not eligible for any vacation pay unless they were still employed on the anniversary of the day they began work. Employment on that date, the company maintained, was a condition precedent to the “vesting” of vacation rights. According to Plastic Dress-Up, employees discharged before their anniversary had no “vested vacation time” under the statute. The court rejected these arguments and held that the right to a paid vacation vested as services were rendered, and once vested, the Labor Law protected the right against forfeiture. Therefore, a condition subsequent, such as not reaching an anniversary date would, in effect result in forfeiture and be void. The court reasoned that vacation pay was “simply a form of deferred compensation.” The court further articulated that vacation pay was not deemed an inducement for future services but rather compensation for past services. Accordingly, the court concluded that under the circumstances of that case vacation pay is earned and vests on a pro rata basis as work is performed.

Illinois courts have also held that discharged employees must receive vacation pay on a pro rata basis as services are rendered. In Golden Bear Family Restaurants Inc. v. Murray, 494 N.E.2d 581 (1st Dist. 1986), plaintiffs were fired shortly before the date on which they would have received the vacation pay earned for the entire year. The company’s vacation policy did not permit vacation pay to be earned pro rata; rather, their vacation pay depended on specific dates and was subject to forfeiture. The court held that the company’s vacation plans violated the Illinois Wage Payment and Collection Act. The court reasoned that “when an employee renders services to an employer, her right to receive the compensation that the employer promised vests as much as her right to receive wages or any other form of compensation. . . The employer must return those benefits that he derives from the continued labor of the employee.” Murray, 494 N.E.2d at 588.

Practical Considerations

Although jurisdictions such as New York are significantly more advantageous to an employer in that they permit vacation pay policies that provide for forfeiture of earned but unused vacation pay upon termination of employment, employers should carefully consider whether such a policy makes good business sense. Some commentators have opined that such policies are arbitrary since the denial of vacation pay often is based on the fact that the employee simply failed to schedule vacation before being discharged. This perception of arbitrariness may lead an employee to seek legal advice. While the employee may have no valid claim for the accrued vacation, the employee ultimately may bring other claims which he or she may not have considered until seeking advice on the forfeiture issue.

Many employers who wish to implement vacation forfeiture policies elect to condition payment for earned but unused vacation time upon the employee supplying a specified period of advanced notice before an employee’s resignation. If an employee resigns abruptly without any advance notice to the employer, under those circumstances the employee will forfeit any payment for earned but unused vacation. However, if the employee provides advance notice (typically two weeks), in those circumstances, the employee will be paid for earned, but unused vacation pay. That period of notice may be essential to employers particularly when dealing with a valued employee.

Multistate and multinational employers should be particularly mindful of the governing law in different jurisdictions concerning the payment of earned but unused vacation time to separating employees. Requirements of varying state and foreign jurisdictions can be more restrictive than US laws in terms of employer flexibility regarding vacation pay policies. For example, under English law, employees enjoy extremely liberal vacation policies on this issue. See Regulation 13 of the Working Time Regulations 1998 (SI 1998/1833); R v Secretary of State for Trade & Industry ex parte BECTU [2001] IRLR 559. French law is to the same effect, but does permit forfeiture upon dismissal for “severe misconduct.” See CODE DU TRAVAIL [C. TRAV.] arts. L. 122-8, 9, L. 223-14. Regardless of how employers shape their polices on these issues, the terms governing earned but unused vacation pay should be clear and explain the circumstances under which earned vacation will be lost. While some jurisdictions permit employers to provide for forfeiture, companies should balance this option carefully -- they may wish to consider whether considerations of employee morale and operation of the business outweigh any savings from a forfeiture policy.

1. Grisetti v. Super Value, Inc., 736 N.Y.S.2d 835 (N.Y.Sup.App.Term 2001). Cf. Spencer v. Christ Church Day Care Center Inc., 720 N.Y.S.2d 633 (3d Dept. 2001).
2. For example, under English law, employees enjoy extremely liberal vacation policies on this issue. See Regulation 13 of the Working Time Regulations 1998 (SI 1998/1833); R v Secretary of State for Trade & Industry ex parte BECTU [2001] IRLR 559. French law is to the same effect, but does permit forfeiture upon dismissal for “severe misconduct.” See CODE DU TRAVAIL [C. TRAV.] arts. L. 122-8, 9, L. 223-14.

Reprinted with permission from the February 7, 2005 edition of the New York Law Journal © 2005 ALM Properties, Inc. All Rights Reserved. Further duplication without permission is prohibited.

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