by H. Mark Adams and Lindsay Thomas

Most employers provide employees with some form of paid time off. What happens when an employee with accrued leave time resigns from employment? Do you have to pay her for that time?

What happened

Yolanda Davis was employed as a nurse by St. Francisville Country Manor, LLC (SFCM), a nursing home facility. Under SFCM's policy, employees who completed a probationary period and worked at least 35 hours per week were entitled to 10 paid days off (PDOs) annually, which accrued at the rate of 3.333 hours per pay period. SFCM's policy also stated that PDOs were provided in lieu of vacation or holidays, so if an employee wanted to take off Christmas Day and be paid, she would have to use a PDO. Additionally, the policy stated, "If you quit without proper notice[,] you forfeit this benefit."

Davis signed a letter of resignation and left SFCM. A few days later, she received her final paycheck in the amount of $347.14.

She contended her final paycheck failed to account for her unpaid PDOs. When SFCM refused her demand for payment, she filed suit, alleging it failed to pay her $1,008 in accrued and earned PDOs. She sought payment of the unpaid "wages" plus 90 days of penalty wages, attorneys' fees, and court costs under Louisiana's final paycheck law, La.R.S. 23:631, 632.

First you win, then you lose

The trial court ruled in favor of SFCM, finding that the PDOs weren't "wages" or "vacation pay" for which compensation was owed and that SFCM's policy specifically provided that PDOs aren't paid to employees who quit without proper notice.
The employer's victory was short-lived, however, as Davis found a more favorable audience in the court of appeal, which reversed the trial court's ruling and awarded Davis her PDOs plus an additional 90 days of pay as penalty wages, attorneys' fees, and court costs.

The court of appeal first observed that La.R.S. 23:631(A) (1)(b) provides that upon the resignation of an employee, the employer is required to pay her "the amount then due under the terms of employment" on or before the earlier of the next regular payday or 15 days following her resignation. According to the court of appeal, the "amount then due under the terms of employment" includes all wages and other compensation earned by the employee during her employment.

Thus, the first issue before the appeals court was whether the compensation Davis sought for her accumulated, unused PDOs was a gratuitous benefit for which no compensation would be due or an "amount due under the terms of employment," which would trigger compensation.

The court explained that vacation benefits fall under the statute as an "amount due under the terms of employment" unless the employer has "a clear, written policy establishing that the vacation time granted is nothing more than a mere gratuity and [is] not to be considered an amount due or a wage."

The court then turned to La.R.S. 23:631(D), which addresses payment for accrued vacation time, stating vacation will be considered an amount due if, in accordance with the employer's policy, the employee is eligible for and has accrued the right to take vacation time and has not been otherwise compensated for the time.

Thus, accrued paid time off constitutes wages earned under the statute and isn't a mere gratuity or an illusory promise. Moreover, while the right to enjoy paid annual leave is prospective, it becomes an employee's vested right when it is earned. Accordingly, the court ruled that Davis' unused PDOs were a compensable "amount due under the terms of employment."

Paid time off is earned compensation, whatever the label

Recognizing that any purported distinction between "PDOs" and "vacation time with pay" is mere semantics, the court determined that an employee's right to compensation vests when the PDOs accrue in accordance with the terms of the employer's policy. No matter the label, the right to be compensated vests when the employee accrues the paid time off.

Accordingly, the court ruled that "accrued but unused vacation time is a vested right for which an employee must be compensated or paid upon discharge or resignation." Since SFCM's policy didn't clearly establish that PDOs were a gift or donation but rather provided that all employees who completed their probationary period and worked at least 35 hours per week earned PDOs at the rate of 3.333 hours per payroll period, Davis was entitled to the compensation she sought.

The court rejected SFCM's contention that Davis, even if otherwise entitled to compensation for her accrued PDOs, forfeited her PDOs by quitting her job without providing proper notice. Louisiana law, specifically La.R.S. 23:634, prohibits employer policies requiring the forfeiture of wages under any circumstances. Thus, since the accrued PDOs constituted wages, the provision in SFCM's policy that mandated forfeiture of PDOs when an employee quits without proper notice was null and void.

Bottom line

It's hard to imagine an employer policy under which vacation or paid time off could be considered a mere gratuity or gift and not earned compensation. Such a policy would have to provide that employees don't earn or accrue vacation or paid time off but that vacation or paid time off is granted in the sole discretion of the employer and therefore employees should have no expectation of being allowed any time off work with pay unless authorized on an ad hoc or case-by-case basis by the employer.

Such a policy or practice obviously would invite inconsistent application and open the door for discrimination claims if employees are granted unequal, albeit discretionary, benefits. However, if your policy states that employees receive, accrue, or are awarded a certain amount of vacation or paid time off corresponding to a period of service, the vacation or paid time off will be considered earned compensation even if you try to call it a gratuity.

Thus, if your employees receive a certain number of hours, days, or weeks of vacation or paid time off per year or accrue a certain amount of vacation or paid time off per pay period, month, or year worked, the vacation or paid time off is earned by your employees and constitutes wages that can't be forfeited.

So remember, you are on the hook to compensate your employees for all unused earned or accrued vacation or paid time off upon resignation or termination. As the employer in this case learned the hard way, the failure to include unused vacation or paid time off in an employee's final paycheck carries a stiff penalty.

H. Mark Adams is an editor of Louisiana Employment Law Letter and a senior partner in Jones Walker's labor relations and employment practice. He can be reached at madams@joneswalker.com or 504-582-8258. Lindsay Thomas is an associate in Jones Walker's labor relations and employment practice. She can be reached at lthomas@joneswalker.com or 601-949-4944.