On January 29, 2018, the Massachusetts Supreme Judicial Court held that sick pay does not constitute wages under the Massachusetts Payment of Wages Law, M.G.L. c. 149, § 148.  As a result, employers are not liable under the Payment of Wages Law if they choose not to pay out accrued, unused sick pay to employees upon termination of employment.     

Background

The case of Tze-Kit v. Massachusetts Port Authority arose out of a fairly unusual sick leave policy.  In this case, the employer’s sick leave policy provided that, upon termination of employment, eligible employees receive payment for a percentage of the value of their accrued, unused sick time.  Under the policy, the percentage would vary depending on the employee’s tenure, i.e., employees who were employed for a longer period of time, or who remained employed until retirement or death, received a greater percentage of their unused sick time.  The policy further provided for no payment of accrued, unused sick pay to employees discharged for cause.

Here, the employer initiated disciplinary proceedings against the plaintiff.  One week later, the plaintiff applied for retirement.  The employer ultimately terminated the plaintiff’s employment for cause.  As a result, the employer did not pay the plaintiff for his accrued, unused sick time based on its application of the policy.

An arbitrator, however, overturned the employer’s termination decision, finding that the employee retired before he was terminated.  In light of that decision, the employer paid the plaintiff the full value of his accrued, unused sick leave (amounting to $46,755.41).  Because of the lengthy grievance and arbitration proceedings, however, the employer did not make this payment until over a year after the plaintiff’s last day of employment.

Plaintiff then sued under the Payment of Wages Law because the employer had not paid him within the time frame required by the statute for final wage payments.  After the trial court ruled for the plaintiff, his former employer appealed.

The Court’s Decision

Under the Payment of Wages Law, employees who resign must be paid in full on the next regular pay day.  In contrast, employees who are discharged must be paid in full on the day of discharge.  These obligations apply only to “wages.”  Thus, the key question on appeal was whether accrued, unused sick leave constituted “wages” under the Payment of Wages Law.

The Supreme Judicial Court began its analysis by noting that the Payment of Wages Law contains no definition of “wages.”  The statute provides, however, that the term wages does “include any holiday or vacation payments due an employee under an oral or written agreement.”  The term also includes “commissions . . . [that have] been definitely determined and ha[ve] become due and payable to [the] employee.”  After reviewing this language, the court noted that the mere fact that the statute does not specifically include sick pay within the meaning of wages does not mean that it necessarily falls outside the scope of the statute.

Nonetheless, the court then concluded that the Legislature did not intend to include sick pay as wages under the Payment of Wages Law.  First, the court observed that because employees’ use of sick time is conditional – it can only be used when an employee or family member is ill – employees “do not have an absolute right to spend down their sick time, employees are not typically compensated for accrued, unused sick time.” Indeed, the court noted that it is common for employers to have “use it or lose it” sick leave policies.

Second, under the circumstances of this case, the court noted that the employer’s payout of accrued, unused sick leave is “essentially, a contingent bonus paid to separating employees for not having used all of their accrued sick time and not engaging in conduct warranting termination for cause.”  In that light, the court stated that the only contingent compensation recognized as wages under the Payment of Wages Law is commissions (which are expressly referenced in the statute). 

Third, the court based its decision in part on the fact that designating sick pay as wages in this case would have made it impossible for the employer to comply with its obligations under the statute, given that the arbitrator overturned the employer’s termination decision over a year after the employee’s resignation.

Takeaways

The Tze-Kit decision is a helpful reminder to Massachusetts employers regarding their obligations under the Payment of Wages Law:  (a) employees who resign must be paid their wages in full on the next regular pay day; and (b) employees discharged must be paid their wages in full on the day of discharge.  In this context, wages means at least salary or an hourly wage, plus accrued unused vacation time and commissions that have been definitely determined and have become due and payable to the employee.  Employers that violate these obligations are liable for mandatory awards of treble damages and attorneys’ fees under the law.

This decision also clarifies that accrued, unused sick pay generally does not constitute wages under the Payment of Wages Law.  Notably, although this case dealt with a sick pay policy put in place prior to Massachusetts’ adoption of its Earned Sick Time Law, the same conclusion should apply to sick leave accrued under the law.  Indeed, the regulations issued by the Attorney General under the Earned Sick Time Law state that employers do not have to pay out unused earned sick time upon termination of employment.

That said, employers that utilize Paid Time Off (“PTO”) programs to satisfy their obligations under the Earned Sick Time Law should be aware that, if, as is often the case, PTO can be used for both vacation and sick time purposes, then accrued, unused PTO likely would be considered to be wages and must be paid out upon the termination of the employment relationship. 

Employers should consult experienced employment counsel when attempting to adopt or revise sick time and/or PTO policies.