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Vacation Pay ALERT

A recent opinion issued by the Tennessee Attorney General, changes the legal standards that have been applied to the payment of vacation to Tennessee employees upon their termination of employment, both voluntary and involuntary, if it is agreed with by the Tennessee courts. Although opinions of the Tennessee Attorney General are not binding on the courts, they are often deemed to be persuasive regarding how Tennessee laws should be interpreted.

Only last year, the Tennessee Department of Labor (DOL) issued a decision, in Gamble v. Sonic Automotive d/b/a Crest Cadillac (Docket No. 20009-04/05), in which the DOL found that the Tennessee vacation pay statute, Tenn. Code Ann. §50-2-103, required employers to pay separating employees for any accrued unused vacation, regardless of the circumstances surrounding the termination of employment. The vacation pay statute provides that:

The final wages of an employee who quits or is discharged shall include any vacation pay or other compensatory time that is owed to the employee by virtue of company policy or labor agreement. This [statute] does not mandate employers to provide vacations, either paid or unpaid, nor does it require that employers establish written vacation pay policies.

In Gamble, a former employee claimed that he was wrongfully denied pay for his accrued vacation after he was discharged by his employer for cause. The employer claimed the employee was not entitled to payment based upon a clear statement in its employee handbook that any unused vacation would be forfeited if an employee was terminated for cause. The DOL ruled that, while company policy would control the method by which employees accrued vacation, Tenn. Code Ann. §50-2-103 "mandates the payment" of any accrued vacation pay or other compensatory time accrued under the policy by the employee. According to DOL, the statute did not give employers discretion whether or not to pay accrued compensation. Once accrued, the statute required all compensation to be paid to the terminated worker, irrespective of whether the termination was voluntary or involuntary.

On November 13, 2006, the Tennessee Attorney General issued an opinion (Opinion No. 06-169) in which he concluded that "[u]nless the employer's policy ... specifically requires compensation of unused vacation pay ... to an employee upon his or her termination of employment, Tenn. Code Ann. §50-2-103 does not require that an employee's final wages include such compensation." The Attorney General noted that the Tennessee DOL has interpreted Tenn. Code Ann. § 50-2-103(a)(3) to require the payment of unused accrued vacation pay to an employee when he or she quits or is discharged, even if the employer's policy disallows such payment. He noted that the DOL views vacation pay as "accrued" and, therefore, protected from an employer's policy that would forfeit such compensation. Under the DOL's interpretation of Tenn. Code Ann. § 50-2-103(a)(3), absent a binding agreement regarding unused vacation pay that allows forfeiture of vacation, an employee's final wages must include unused vacation pay.

The Attorney General construed the vacation pay statute differently. He concluded that, unless the employer's policy requires compensation of unused vacation pay or other compensatory time to an employee upon his or her termination of employment, Tenn. Code Ann. § 50-2-103(a)(3) does not require that an employee's final wages include such compensation.

The Attorney General noted that the statute's plain text predicates payment to an employee of unused vacation upon the existence of a company policy that provides such compensation. Under the statute, an employee's final wages upon termination must include vacation pay "that is owed by virtue of company policy or labor agreement." The Attorney General observed that the phrase "by virtue of" means "because of". Therefore, an employee's final wages should include unused vacation pay only if an employer established a vacation policy, and that policy obligates the employer to pay for vacation upon termination.

The Attorney General held that the text of the employer's company policy would dictate whether an employee's "final wages," under Tenn. Code Ann. § 50-2-103(a)(3), "shall include any vacation pay or other compensatory time." He found that the statute effectively gives the force of law to an employer's policy on the issue of whether unused vacation pay is owed to an employee at his or her termination.

What about the Tennessee DOL's interpretation to the contrary? The Attorney General stated that "[w]e respectfully disagree with the Department's construction of § 50-2-103(a)(3)." He noted that, under the DOL's interpretation, if the employer has a policy that forfeits any unused vacation pay, the DOL would nevertheless require that the employee's final wages to include vacation pay because the employee already would have "accrued" it. But, the Attorney General stated, "[t]his interpretation disregards the effect of the employer's unused vacation policy contrary to the plain meaning of § 50-2-103(a)(3)." According to the Attorney General, if the employer's vacation policy specifically disallows such compensation upon an employee's termination, the employee's "final wages" would not include vacation pay because this pay would not be owed "by virtue of company policy." Tenn. Code Ann. § 50-2-103(a)(3).

So, what should an employer do in light of the Tennessee Attorney General's recent opinion, if they wish to avoid paying separating employees (or perhaps only those employees whose employment is terminated involuntarily) vacation pay? It should consider drafting its vacation policy to provide for an express non-payment of any unused vacation, stating that such vacation is forfeited upon termination of employment. Similar language can be used with respect to other forms of benefits, such as sick time, paid time off (PTO), etc. Additional legal guidance should be forthcoming from the Tennessee courts, whose opinions on these questions would be legally binding upon employers, unlike the Attorney General's opinions.


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