The Law and Liability of Leave Time at Termination

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The Law and Liability of Leave Time at Termination

Many cities find out the hard way, that the cost of accumulated unused leave time at termination can be extremely high. Before this happens to your organization, be sure to review current policies and practices and the required costs associated with each. In this article, we will examine the law regarding various types of accumulated unused leave time.

An employer’s personnel policy may provide various types of leave time for employees, including vacation, sick, personal and compensatory time. Whether an employer has to pay an employee for any unused accumulated leave time will depend on the employer’s personnel policy and limited statutory requirements, as well as past practice.

Regarding vacation, sick and personal leave issues, one of the "questions of fact" that the Labor Cabinet must determine before wages can be declared due at termination is whether the vacation was vested or earned either by written policy or past practice of the employer. There is no law in Kentucky that requires an employer to pay these types of leave at termination, so it will depend on the wording of the policy or the employer’s past practice.

If the policy states that the employee will be paid leave time upon termination of employment, that leave time is considered vested at the time it is earned and must be paid. If the policy states that only up to a certain amount of leave time will be paid out, then no more than that specific stated amount can be vested by the employee. If the policy states that no leave time will be paid upon termination, then the employee will have no vested leave time.

However, if the policy states that there will be no payout of leave time at termination but the current or previous administration paid employees for unused accumulated leave time, the employer may be under obligation to pay employees accumulated unused leave time at termination, until the policy is changed. And then, even with a change in policy, there will likely still be some liability as stated later in this article.

The payout of compensatory time (comp time) for nonexempt public employees is covered under KRS 337.285: a nonexempt employee must be paid for any unused comp time upon separation of employment. The statute provides for two formulae for the payout of nonexempt employee comp time of not less than:

The average regular rate received by the employee during the last three years of the employment with the city; or The final regular rate received by the employee at the time of termination.

There are no statutory requirements for employees who are truly exempt from overtime to be paid for accumulated unused comp time at termination. In this case, the employer would follow their policy as written, as they would any other leave.

In the next article we will examine liability and other issues with these leave policies. For questions or sample leave policies contact Andrea Shindlebower Main, KLC Personnel Services Manager.

The liability and other issues related to unused leave time.

If the employer provides payout of any accumulated unused leave time at termination, the employer should keep that liability on the books. The amount that should be shown as a liability is the amount that would have to be paid out any time an employee leaves employment. This requires the employer to maintain a running record of all leave time accrued and used by each employee. Payout of leave time at termination, if required, can be very costly. If an employee leaves unexpectedly, the employer, under wage and hour law, would have to provide payment of all wages owed pursuant to KRS 337.055. This statute states payment must be made no later than the next normal pay period following the date of dismissal or voluntary leaving or 14 days following such date of leaving, whichever is later. For purposes of this statute, the law considers accumulated unused vested leave time as wages so they must be paid to the departing employee no later than the timeframes listed in KRS 337.055.

If after review, the employer decides to change the policy to limit or take away the liability created by payout of leave, the employer must keep in mind any accumulated unused leave time under the old policy or practice would be considered vested and therefore subject to payout at termination based on the policy that was in place at the time the leave was earned. The employer would have several options at this point, including:

Paying the employee the amount of accumulated earned leave time at the time of the change in policy to bring the employee to the new maximum cap of leave time; or Keep the amount of accumulated earned leave time on the books to be paid out at the employee’s separation from employment, minus any leave time used up to termination of employment.

Also note that if the employer includes a cap on what may be earned by the employee, based on the written policy, the employee should be prevented from earning additional leave time until the leave hours fall below the stated cap.

Lastly, from a health perspective, employers should be certain that employees are taking the provided leave time, whether it is sick, vacation or personal leave. It should not be an encouraged badge of honor for a sick employee to come to work. When this happens, sick employees will likely end up dealing with an illness for a longer period than they would have if rest were encouraged. Sick employees coming into the workplace also risk spreading the illness to their co-workers which can result in more employees being off from work. Studies also show that employees that take vacation leave on a regular basis are much more productive and less likely to become sick. As an employer be sure to communicate the details of the leave policies when hiring employees and as a reminder throughout the year, as well as encouraging managers to support and enforce the policies.

For questions or sample leave policies contact Andrea Shindlebower Main, KLC Personnel Services Manager.