Oh, By The Way…

A local attorney published the following e-brief on a decision that requires employers in Nebraska to not only pay accrued vacation but also PTO time.  I thought it was a very interesting article and I wanted to share it with you on our blog site.  – Mark Mentele

Supreme Court Clarifies PTO Payout Rules

Do you pay accrued PTO to departing employees? If not, please read below because the law recently changed.

That was then . . .

On October 20, 2006, the Nebraska Supreme Court unanimously held that “accrued vacation time . . . is due and payable as wages upon termination.”  In Roseland v. Strategic Staff Management, four employees who voluntarily resigned demanded payment for their unused vacation time.  The company vacation policy provided that an employee accrued one week of vacation after one year of continuous service with the company, two weeks after two years of continuous service, and three weeks after five years of continuous service.  There were no other conditions to be eligible for vacation pay.  After the employees resigned, the employer refused to pay the accrued vacation because its employee handbook provided that “upon termination employees will not be paid for unused vacation time.”  The employees filed suit alleging that the company violated the Nebraska Wage Payment Collection Act (“Act”).  The Nebraska Supreme Court agreed.

Everyone knows that employers must pay unpaid “wages” after an employee resigns or is let go.  What is not so common knowledge is that the Act defines “wages” broadly to include “fringe benefits, when previously agreed to and conditions stipulated have been met by the employee  . . . .”  The Act specifically includes sick and vacation pay within the definition of “fringe benefits.”

In response to the Roseland decision, in 2007 the Nebraska Legislature amended the Act to clarify that accrued “sick leave” need not be paid out at termination. The amendment provided:

Paid leave, other than earned but unused vacation leave, provided as a fringe benefit by the employer shall not be included in the wages due and payable at the time of separation, unless the employer and the employee or the employer and the collective-bargaining representative have specifically agreed otherwise. 

But what about Paid Time Off (“PTO”), which typically allows employees time off for any purposes?  When the Nebraska Legislature considered amending the Act in 2007, it debated whether other forms of leave including PTO need to be paid out upon termination.  During the floor debate, Senator Abbie Cornett, the chair of the committee that advanced the bill to the entire Legislature stated:

The Committee felt that it was appropriate to address sick leave; however, there are numerous other types of paid leave, such as bereavement and paid time off, or PTO.  By using the generic term “paid leave” it is our intention that any type of paid leave other than vacation leave does not have to be paid out at the time of separation unless otherwise bargained. 

Consequently, many employers and a Lancaster District Judge (in Gallentine v. B&R Stores, Inc.) believed that “PTO,” a hybrid of vacation and sick leave, was different than “vacation” and not includable in “wages” after an employee resigns or is let go.

This is now . . . .

In July 2010, two employees separated their employment from PayFlex.  PayFlex denied their demand for payment of their accrued PTO hours because its policy clearly stated, “PTO will NOT be paid out upon separation of employment.”

Both the county court and the district court concluded that PayFlex’s policy deprived the employees of earned “vacation.”   The district court stated PayFlex’s PTO plan:

by its own definition, includes vacation leave.  There is nothing in [PayFlex’s] PTO program that designates or apportions its PTO to reflect a separate determination of earned vacation leave, and [PayFlex] admits that an employee could use all of his or her earned PTO for vacation leave.  The Court therefore finds that all of the earned PTO credited to [the employees] at the time of their separation from employment with [PayFlex] should be paid to the [employee’s.]

Upon appeal to the Nebraska Supreme Court, PayFlex contended that PTO hours are not unused vacation leave that must be paid to an employee upon separation of employment.  It also argued that the county court’s determination is contrary to the legislative history of the 2007 amendment.  The employees contended that because an employee can use earned PTO hours the same as earned vacation hours, PTO hours are an earned benefit—not a contingent benefit—which an employer must treat as “wages.”

On May 3, 2013, a deeply divided Nebraska Supreme Court weighed in on this debate and held 4 to 3 that the definition of vacation leave is indistinguishable from PayFlex’s definition of its PTO benefit because the PTO could be used for purposes of taking a vacation.

The court explained that vacation leave and PTO are not conditioned on anything other than an employee rendering services for an employer.  In contrast, “sick leave” is ordinarily understood to be paid leave for an illness or injury while employed.  In other words, the distinction between paid vacation leave, PTO and paid sick leave is that sick leave is contingent upon an occurrence and vacation leave and PTO are not.

What does this mean for Nebraska employers?  Upon termination, an employee is now unequivocally entitled to payment for any accrued and unused vacation and, because it is like vacation, for accrued and unused PTO.  The policy before the Supreme Court in the Payflex case contained a “use it or lose it” provision under which not all accrued PTO could be carried over from year to year.  The Court did not comment on this provision, but such provisions could pose problems for employers in the future.  Please let us know if you need help revising your PTO policy to minimize the impact of this decision.

Woods & Aitken LLP focuses its practice of law on estate planning, labor & employment, bankruptcy, agricultural, banking, corporate, real estate, and other legal practice areas throughout the United States. For more information visit their website woodsaitken.com.