A question that employers very often face is whether an employee who leaves employment is entitled to be paid their accrued vacation pay. The answer is: it depends. Courts in Indiana have addressed the vacation pay question for decades. But now, for the first time, the Indiana Supreme Court has spoken with clarity by expressing the general rule and the key exception that all Indiana employers should know.
In a case that was decided on July 16, 2013, the Indiana Supreme Court looked to past decisions of the lower courts and issued an opinion that contained a helpful statement about when an employer has a legal obligation to pay their departing employees accrued but unused vacation pay.
The General Rule on Vacation Pay
The Court begins with a general statement of the employer’s obligation to pay vacation pay:
- An employee who is promised vacation time by his/her employer is entitled to use that time or save it for use or payment at a later date.
- An agreement to provide vacation pay to employees made before the employee performs his/her service and based upon the length of service and time worked is not a gratuity but rather compensation for services.
- Absent some other arrangement or policy, when an employer makes an agreement to provide compensation for services, the employee’s right to compensation vests when the employee renders the services.
Arrangements or Policies Can Trump the General Rule
However, the Court says this general rule can be abrogated by an arrangement or policy of the employer that either places a prerequisite on an employee’s ability to use the promised vacation time or prevents the employee from using the vacation time after a certain date or period of time. So, the key for employers in Indiana is to establish an arrangement or policy that clearly and specifically addresses the payment of accrued vacation pay.
Example
The Court provides an example of how the rule and the exception can be applied:
- An employer who promises a new employee $40,000 a year and two weeks of vacation may require that employee to work for a specified period of time before actually taking the promised vacation time. Alternatively, the employer could permit the employee to use the vacation time anytime he/she likes so long as it is used before December 31; otherwise, the vacation time (or the corresponding pay) is forfeited. Either of those scenarios would be permissible “arrangements or policies” under Indiana law.
- Therefore, if the employee quits (or is fired) before the employee had worked the requisite amount of time to be able to use the promised vacation days, or if the employee failed to use the vacation time before the expiration period, the employer would not be required to pay the employee for the unused vacation time.
Lessons for Indiana Employers
The general rule and the “arrangements or policies” exception have been the law in Indiana for a very long time. The Indiana Supreme Court’s articulation of the rule and the exception is a first and gives great weight to the importance of developing clear and specific arrangements or policies that address what employers and employees can expect with regard to the payment of accrued vacation pay. If vacation pay is withheld improperly, then Indiana’s Wage Payment statute comes into play. That can result in a judgment of three times the amount of the improperly withheld vacation pay plus attorneys’ fees, interest and court costs. To avoid that outcome, employers should:
- Consider reviewing existing vacation and termination policies to make sure they say exactly what is intended;
- Consider highlighting these provisions in policy statements;
- Consider using examples in the policy;
- Consider that if any policy changes are made and any vacation had been “earned” under a previous policy, then the changes should only apply prospectively;
- Consider obtaining employee acknowledgments of any policy changes; and
- Consider the effect on employee morale of any change that might be perceived as a “take away.”
If you have any questions, please contact Steve Lyman at slyman@wp.hallrender.com or your regular Hall Render attorney.
