In August 2007, the Court of Special Appeals issued an unpublished decision in Catapult Technology, Ltd. v. Wolfe, et al., finding that accrued-but-unused vacation leave was owed to employees at termination despite a written policy that employees would forfeit leave if they failed to give two weeks’ notice of departure. The parties resolved the case privately without another appeal, and no binding decision has been issued.
The case arose when Catapult Technology, a government contractor, lost a contract to a competitor. Catapult challenged the award and informed its employees they were subject to a non-compete agreement in their employment contracts. Catapult also reminded employees they would forfeit accrued but unused vacation leave if they failed to give two weeks’ notice of departure in accordance with a policy in the Employee Handbook. The employees left Catapult anyway to join the new contractor without giving the requisite notice. Catapult did not try to enforce the non-competes, but it did withhold the leave.
Fourteen employees sued in Circuit Court, alleging the leave constituted “wages” under the Wage Payment and Collection Law (WPCL). The employees further claimed the forfeiture provision in the employee handbook was contrary to Maryland public policy and was invalid. The plaintiffs relied on Medex v. McCabe, in which the Court of Appeals decided that an incentive payment qualified as “wages” under the WPCL. In Medex, the Court stated “an employee’s right to compensation vests when the employee does everything required to earn the wages.” Medex further held that the requirement and public policy that employees have a right to be compensated for their efforts cannot be contracted away.
The Circuit Court agreed that Medex controlled in Catapultand held the leave was a “fringe benefit” that had been earned as “wages” under the WPCL. The employees were awarded damages in the amount of the leave. A jury trial on liability for treble damages resulted in an additional award to the employees.
In Catapult’s appeal to the Court of Special Appeals, it argued that its policy did not conflict with Medex, since it only withheld payment for failure to give notice; otherwise, the leave was paid. Catapult also argued that under Maryland law, payment for leave at termination depended on the employer’s policies. The Court of Special Appeals rejected both arguments. It found that Medex applied and the employees had “earned” their leave in exchange for work. It referred to specific language in Catapult’s Employee Handbook, that employees “earn” and “accrue” leave each pay period. The employees were awarded their leave, but the Court reversed on liquidated damages.
Catapult Technology, while non-binding, appears to have the support of the Division of Labor and Industry, which revised its online guidance in November. Previously, the guidance said that payment of leave depended on the employer’s policy and whether it was communicated to employees in advance. The new guidance states “when an employee has earned or accrued his or her leave in exchange for work, an employee has a right to be compensated for unused leave upon the termination of his or her employment regardless of the employer’s policy or language in the employee handbook.” Although the Division’s guidance also is not binding, a violation could entitle employees to remedies for unpaid wages under the WPCL.
While there is no current binding decision on this issue, it is likely to re-emerge, and employers would be wise to review and, if necessary, revise their policies sooner rather than later. One way to address the issue is for employers who have “use it or lose it” policies to change from a policy where unused leave is forfeited at year’s end to a “rollover” policy in which leave carries over from year to year but is capped at a certain level. California employers, for example, have addressed a prohibition on “use it or lose it” policies in this manner.
Another possibility is a policy where accrual of leave is not tied to actual work performed. Medex distinguished between bonuses that were compensation for services and “earned” as wages, and bonuses that were gratuities, revocable before delivery, and were not “wages.” The Court of Special Appeals made a similar distinction in Catapult when referring to Stevenson v. Branch Banking and Trust, in which severance pay, a “wage” under the WPCL, was not recoverable because it was tied to a non-compete provision and did not depend upon time worked. The key to this kind of a policy is that accrued leave not be a quid pro quo for work performed but instead depend upon some other event, such as complying with Catapult’s notice of resignation policy.
Christine Zebrowski is the Founder and Principal of Overbrook Law Group LLC. Her practice focuses on management-side employment law, counseling, litigation and training and is based in Washington, D.C. and Maryland. She is also President and General Counsel of Overbrook Resources LLC, a Human Resources consulting firm based in Washington, D.C.