Maryland Governor Martin O'Malley signed into law emergency legislation amending the Maryland Wage Payment and Collection Law, Md. Code Lab. & Empl. §§ 3-504 & 3-505, on April 24, 2008, to provide employers with a safe harbor against the requirement that they pay out accrued paid leave upon termination of employment. Under the new law, an employer's written vacation pay or other paid leave policy will govern whether the employer is required to pay out unused accrued leave upon termination of employment. The amendment is retroactive and covers employees whose employment terminated after November 1, 2007.
To qualify for the safe harbor protection, an employer must:
(1) have a written policy providing that employees are not entitled to payment of any unused balance of paid leave upon termination; and
(2) distribute that policy to its employees at the time they are hired.
The law provides no protection to employers who do not have a written policy.
The Maryland legislature amended the law to overrule the holding in Catapult Technology, LTD v. Paul Wolfe, No. 997 (Aug. 20, 2007) (unpublished). In Catapult Technology, the Maryland Court of Special Appeals (the state's intermediate appellate court) held that accrued, unused paid time off (PTO) constitutes a "wage" under the Maryland Wage Payment and Collection Law and must be paid to employees upon termination. In Catapult,the employer had a written policy of not paying vacation pay to employees who left without providing a two-week notice. When the employerlost a government contract, several of its employees left without providing the required notice and immediately took positions with the company that won the contract. In reliance on its written policy, Catapult refused to pay them for unused PTO. The former employees sued under the Maryland Wage Payment and Collection Law. The Circuit Court for Montgomery County held that, because leave accrued based upon the numbers of hours worked, the leave was a "wage" that could not be withheld at termination. The Court of Special Appeals affirmed the lower court decision.
In reaching its decision in Catapult, the appellate court relied on a Maryland Court of Appeals decision, Medex v. McCabe, 372 Md. 28 (2002), which held that employees are entitled to commission payments "when the employee does everything required to earn the wages." In Catapult, the Court of Special Appeals found that the employer awarded the paid leave in exchange for employees' work. Accordingly, once the hours were worked, an employee was entitled to be paid for the leave earned for working those hours. However, the Court of Special Appeals reversed the trial court's award of treble damages (which, under Maryland law, are payable upon an award under the Wage Payment statute where a court determines there was no bona fide dispute as to the employee's entitlement to receive the wages in question). The Catapult court determined that there was a bona fide dispute between the parties that precluded a treble damages award. The case later settled, so Maryland's highest court did not have an opportunity to consider the issue.
Following the decision in Catapult,the Maryland Department of Labor, Licensing and Regulation (DLLR) adopted the position that vacation pay was a wage that must be paid upon termination. As a result of the amendment, the DLLR has revised its position to reflect that employers are permitted to avoid paying accrued leave upon termination if they provide their employees with written notice of this policy at the time of hire. The DLLR website now states:
The Maryland Guide to Wage Payment and Employment Standards -
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
The DLLR's position confirms its recognition of an employer's right to introduce a policy by which employees forfeit paid leave upon termination of their employment.
In light of the amendment, Maryland employers are encouraged to:
- Ensure the policy on payment of accrued leave upon termination is in writing.
- Establish clear language in the policy explaining the treatment of accrued paid leave upon termination of employment (and whether it will be paid or forfeited).
- Ensure the policy is provided to every employee at the time of hire.
- Ensure that any changes in the policy are communicated to all employees in writing.
Jackson Lewis attorneys are available to answer inquiries regarding this and other workplace issues and to assist employers in achieving compliance with wage payment requirements.