Legal Bulletins

In a dramatic departure from existing law, a three-judge panel of Maryland's second highest appellate court recently ruled that upon the termination of their employment, employees must be paid for the leave time which they had earned, invalidating a company policy under which such leave time was forfeited. While this result is mandated by law in some states, Maryland's Department of Licensing, Labor and Regulation (DLLR), which oversees the enforcement of the state's wage payment laws, has long taken the position that an employer is not required to pay for earned leave time if the employer notified its employees of a policy under which unused leave time would be forfeited. Many Maryland employers have policies which provide that employees will forfeit their unused vacation time if they are fired or they resign without providing sufficient notice. Under the court's decision, such polices would violate Maryland law.

The case, Catapult Technology, Ltd. v. Wolfe, involved a claim by fourteen former employees that the company violated Maryland's Wage Payment and Collection Law (WPCL) by refusing to pay them for earned paid time off (PTO) leave because they resigned without giving two weeks' notice as required by Catapult's policy. The court stated that the WPCL requires employers to pay departing employees for all wages owed to them for work that was performed prior to termination and the court noted that under the WPCL, the term 'wages' includes 'fringe benefits' and 'any other remuneration promised for service'. The court found that the unused leave at issue was 'given in remuneration' for the employee's work and therefore constituted 'wages' under the WPCL. The court rejected the employer's argument that the WPCL should be interpreted in accordance with DLLR's published guidance to employers. The court also dismissed the argument that because the Maryland legislature had considered, but did not enact, a law that would have required payment of accrued vacation leave upon termination of employment, the legislature understood -- and accepted - that payment of such leave time was not required under current Maryland law.

The appellate court's decision is unpublished and therefore is not binding upon other courts. Nevertheless, it is the only decision by a Maryland appellate court addressing the issue. As a practical matter, trial court judges may follow the decision, regardless of it being unpublished.

A failure to pay for earned leave time upon termination of employment exposes an employer to adverse financial consequences. The WPCL entitles a prevailing employee to recover the unpaid 'wages' and attorney's fees. The law also allows employees to recover treble damages where there is no 'bona fide' dispute as to whether the employee is owed the amount at issue. In light of this recent decision, there will be a question as to whether a failure to pay for such leave time is due to a bona fide dispute.

The court's decision may call into question the legitimacy of 'use it or lose it' policies, which require employees to use their annual leave by a given date (such as the end of the calendar year or an anniversary date) or forfeit the earned leave. While the legality of 'use it or lose it' polices was not addressed by the court, such policies arguably fall within the logic of the court's decision prohibiting forfeiture of earned wages.

The court's decision does not address sick pay. Sick pay is distinguishable since it is generally considered to be a benefit providing protection of pay to an employee who misses work due to injury or illness, rather than a part of an employee's earned wages. However, the court's decision creates concerns for employers with a PTO or similar policy which combines vacation, sick, personal and other types of leave into one category. If the court's decision is followed, PTO policies will be more expensive for employers.

Until this area of law is clarified by the courts, employers may incur liability under the WPCL if they follow a policy under which earned leave time is subject to being forfeited. Employers should review their existing vacation, PTO, and other paid leave policies and consider changes which may enable them to reduce their obligations to pay departing employees for unused leave time in a manner which limits their exposure to potential claims.

For assistance in reviewing and revising your paid leave policies, contact: