Employer’s Must Pay Accrued but Unused Vacation Leave

Employers beware! You are now required to pay departing employees for their accrued, but unused, vacation leave. In a surprising reversal, the Employment Standards Service of the Maryland Department of Labor, Licensing and Regulation (DLLR), the agency responsible for administering Maryland's wage and hour laws, recently changed its long standing regulatory position that employees had no right to payment for accrued, unused vacation at termination, absent an employer policy entitling them to the same.

The DLLR’s new position is articulated in its revised "Maryland Guide to Wage Payment and Employment Standards" which states, in relevant part, that “[w]hen 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.” In addition, the guide warns employers that “use or lose” vacation policies requiring employees to use or forfeit their accrued paid leave by the end of the calendar year, are unlikely to pass legal muster. The DLLR has not changed its policy with respect to sick leave reasoning that the purpose of sick leave is to provide employees with “a contingency against illness” and “cannot be claimed at termination in the same manner as unused vacation leave, unless expressly allowed in a contract or an employer's policy.” Maryland Guide, § IV(H).

To comply with the DLLR's new interpretation of Maryland law, employers should take the following steps:

1. Pay employees for their accrued but unused vacation/paid time off when their employment ends (for any reason).
2. Amend your Employee Manual to reflect this change.
3. Review policies regarding the accrual of vacation and PTO leave and consider placing limits on accrual. This would reduce the amount of accrued leave that would have to be paid at termination.