Maryland Amends Wage Law to Confirm that Accrued Vacation Need not be Paid upon Termination

As reported previously, in August 2007, the Maryland Court of Special Appeals ruled in Catapult Technology, LTD v. Paul Wolfe, that accrued vacation pay constituted “wages” which much be paid to employees upon their separation, regardless of any policies to the contrary. Although the decision was unpublished, and thus had limited authority as precedent, the Maryland Department of Labor, Licensing & Regulation (“DLLR”) adopted the ruling in its published guidance, the “Maryland Guide to Wage Payment and Employment.” Specifically, the DLLR stated:

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.

Previously, it had been the position of the DLLR that an employee’s entitlement to unpaid vacation leave depended on the employer’s policy.

The Catapult decision was a tremendous boon for the plaintiffs’ bar and subjected employers to liability for up to treble damages under the Maryland Wage Payment & Collection Law (“MWPCL”) if they failed to pay departing employees their accrued leave, particularly after the DLLR revised its guidance. Under the MWPCL, an employer is subject to double or treble damages if a court finds that there was no “bona fide” dispute as to the employee’s entitlement to the wages at issue.

However, in a fairly quick turn of events, the Maryland General Assembly has passed emergency legislation amending the MWPCL to provide that accrued vacation leave need not be paid upon separation, if the employer has a written policy so providing, and that policy was provided to employees at the time that they commenced employment. Governor O’Malley has approved the law, which applies retroactively to employees who were terminated after November 1, 2007, which was the date the DLLR published its guidance adopting the court’s holding in Catapult. The “Fiscal and Policy Note” prepared in connection with the legislation made clear that the purpose of the law was to address the effects of the Catapult decision.

Following the enactment of the new law, the DLLR has again revised the Maryland Guide to Wage Payment and Employment. Now, the provision governing vacation leave states:

Wages and Compensation – Unused Vacation at Termination? Is It Payable? The answer to this question depends on the employer’s written policy, and whether this policy was communicated to the employee at the time of hiring. For example, if an employer informs employees in writing at the time of hiring that unused vacation leave will be lost or forfeited upon termination, then an employee will not be able to claim it. On the other hand, where the employer does not have a written policy that limits the compensation for accrued leave to a terminated employee, that employee is entitled to the cash value of whatever unused earned vacation leave was left, provided it was otherwise usable. (Emphasis in original).

The amendment is very good news for employers. In essence, the new legislation has restored the MWPCL to its pre-Catapult state, with the clarification that the employer’s policy denying any payout of vacation leave must be in writing and must be disseminated to employees at the time they commence employment. A policy in an employee handbook would suffice.

It should be noted, however, employers may still face claims from employees who separated before November 1, 2007 and were not paid for their accrued vacation leave. The new legislation leaves open the question of whether vacation leave constituted “wages” before November 2007. Given that the DLLR’s pre-November 2007 guidance stated that vacation leave was payable only if the employer’s policy so provided, and given that the Catapult decision was unpublished, an argument can be made that employees terminated prior to November 2007 have no entitlement to payment for their accrued leave.

Should you have any questions regarding the new decisions and how they apply to your workforce, please contact Jeffrey J. Pargament at (202) 775-0707 or by email at jpargament@pandhlaw.com.