Vacation pay suits on the rise

By Dick Dahl Staff writer

Class actions by employees claiming payment for unused vacation time when their employment ends are increasing, and lawyers for workers and management alike say that employers should be paying attention.

In December, Target Corp. agreed to settle a lawsuit with up to 270,000 California workers for up to $10 million. (Wong v. Target Corp. No. 06-5398 (N.D. Cal.))

That agreement came on the heels of a $3-million settlement in a case where 15,000 employees of Adecco, an international temporary-staffing company, had claimed that the company wrongfully denied them accrued vacation pay. (Senior v. Adecco USA, Inc., No. CGC 04-431031, San Francisco County Superior Court).

Other cases are pending in Illinois (Arrez v. Kelly Services, Inc., and Polk v. Adecco USA, Inc.) and Washington (McGinnity v. AutoNation Inc.)

"There appears to be more litigation around this area of vacation pay at time of termination," said Jerry Pigsley, a Lincoln, Neb. lawyer who represents employers. "More and more cases are coming down where the courts are saying it's a vested benefit and you have to pay it."

'Use it or lose it'

At issue is the common employer practice of requiring employees to use their vacation time or lose it. This means that when employees are terminated or leave of their own accord, their unused vacation time cannot be cashed in.

No federal or state laws require employers to provide paid vacation. But when they do, they must abide by state laws governing what happens with unused vacation time.

This means the issue is highly state-specific. Currently, California and Illinois lead a minority of states that have statutes prohibiting or limiting employers' ability to enforce "use it or lose it" language in employee handbooks.

But even in states like Florida and Texas, where restrictive vacation-pay policies have some teeth, lawyers are advising employers that things could change in time.

"I'm keeping my eye on it because I see what's happening elsewhere," said Sally Still, a partner at Buckingham, Doolittle & Burroughs in Boca Ration, Fla., who represents employers.

In Nebraska, employers recently lost their ability to rely on "use it or lose it" employment policies.

A group of directors who voluntarily left a temporary help company, Strategic Staff Management, filed suit in 2000 seeking pay for unused vacation time despite the fact that the company's handbook prohibited payment for unused vacation.

The Nebraska Supreme Court sided with the employees, holding that employers must pay unused vacation time even if a handbook states otherwise. (Roseland v. Strategic Staff Management, Inc., 722 N.W.2d 499 (2006).)

Pigsley, a partner in the 18-lawyer firm Harding & Shultz, said that after the ruling he was inundated with calls from clients who were confused about what it meant.

"A lot of them looked at their books and said, 'We've got a lot of employees with a lot of sick leave built up. Do we now have to pay that out at the time of termination?'"

He said that in recent years many employers have adopted "PTO" plans in which vacation, sick leave, personal days, etc., are lumped into one category called "paid time off."

The question of whether sick leave or personal days were covered by the state supreme court's decision was the"500-pound" gorilla for Nebraska employers and spurred the legislature to pass a law in April 2006 stating that such days were not covered.

Nevertheless, Pigsley said that he now counsels his clients to stop using PTO plans and go back to the old method of separating out vacation days from other categories of paid leave.

Meanwhile, he said, one question remains unanswered: The statute passed by lawmakers is not retroactive; it is prospective from the date of its passage.

"You could have employees who have worked for many years and banked their sick pay and now they come in and say, 'Before the law changed, I had all this money in the bank and I want to be paid for it.' There's a good question about whether they have legitimate claims and we're waiting to see what happens with that," Pigsley said.

Other state actions

Other states have taken varied approaches to this issue. For example, last August the Maryland Court of Special Appeals issued an unreported decision rejecting the use of "use it or lose it" policies by employers. (Catapult Technology LTD v. Wolfe, No. 997 (2007).)

But shortly thereafter, the Minnesota Supreme Court concluded that the issue was purely a matter of contract between employer and employee. (Lee v. Fresenius Medical Care, Inc., 741 N.W.2d 117 (2007).)

The wording of the Minnesota decision raised a few eyebrows.

"They kept referring to the employee handbook as a contract," said Elizabeth M. Marsh, a partner in the Austin, Texas, office of Thompson Coe who represents employers. "Of course that makes any employment lawyer cringe, because we typically fill [employee handbooks] up with disclaimers that this is not a contract."

In employer-friendly Texas, Marsh said serious challenges have not arisen.

"The bottom line is the employers can put any parameters on vacations that they see fit," she said. "'Use it or lose it' is allowed as long as it's spelled out clearly in an employee handbook or a separate employment contract."

In California, by contrast, unused vacation pay is considered an integral feature of an employee's compensation package.

"If you work a week and you're terminated and the employer has to pay you for that week of work, why shouldn't you be paid the rest of your compensation package?" asked Daniel Feinberg, a partner in the Oakland plaintiffs' firm of Lewis, Feinberg, Lee, Renaker & Jackson.

"California and some other states recognize that vacation is part of your compensation, just like salary, and it accrues as you work. Therefore, it can't be forfeited and any accrued vacation is due upon termination," he said.

Feinberg said he's handled about a dozen of these cases in the last few years, including the Adecco and Kelly Services cases, and that class actions involved vacation pay take up about half of his time.

He sees no reason why that caseload will go away any time soon.

"Companies are just always looking for ways to nickel and dime their employees," he said. "They're trying to squeeze money out of the rank and file so they can turn around and give enormous bonuses to the top management. And it doesn't seem fair."

Questions or comments can be directed to the writer at: dick.dahl@lawyersusaonline.com