By remboltludtke

Did Nebraska Just Breathe New Life Into An Employer’s Ability To Place Limits On The Payment Of Unused Vacation To Departing Employees?

Posted in Employment, Labor and Benefits, Mark Fahleson, News

Mark A. Fahleson, Rembolt Ludtke LLP

            Nebraska employers are often confused about what state law requires when it comes to an employee’s entitlement to unused vacation and paid time off (PTO) when the employee is fired or quits.  A recent Nebraska court decision further muddies the water.

            In Drought v. Marsh, 304 Neb. 860 (Jan. 17, 2020), plaintiffs Kevin Drought and Kyle Fessler were employed by Longwells in Lincoln as its general manager and head chef respectively. Both were required to sign a “Longwells Employee Agreement” that, according to the court’s opinion, appears to have been drafted by Longwells without the assistance of legal counsel and was based on a sample used by a technology company, not a bar/restaurant like Longwells.  The sole reason Longwells wanted the plaintiffs to sign the agreement was for the noncompetition provision it contained.

            The employee agreement contained a provision that provided in part that “you will be expected to work a minimum of 40 hours per week other than paid time off which is addressed below.” The “Termination” provision of the agreement stated that “if, at any point, 60 days pass with you billing no hours to a client, this agreement will be considered terminated.”  The “Compensation” section of the employee agreement included provisions that were clearly not intended for restaurant workers, such as:

  • “Your earnings will be based on your billable hours.”
  • “You will be paid <<employee’s hourly wage rate>> . . . for every hour billed to and approved by the client”
  • “Billable hours are determined based on the Company’s understanding with its clients”

            The PTO section employee agreement specified that PTO included vacation, sick days, and holidays. A table showed that when the “Employment Anniversary” is “[l]ess than 2 years,” an employee would earn 4 hours of PTO “per 40 hour+ week billed.” Once the employment anniversary reached 2 years, the amount of PTO earned increased to 5 hours.

            The plaintiffs were salaried employees, were not required to record hours worked, and did not have clients or billable hours.  After separating from employment with Longwells the plaintiffs demanded payment for accrued, unused PTO and, when they were not paid, they filed a lawsuit under the Nebraska Wage Payment and Collection Act (“NWPCA”).  The NWPCA requires a covered employer to pay “unpaid wages” to an employee who separates from the payroll. It defines “[w]ages” to include “fringe benefits, when previously agreed to and conditions stipulated have been met by the employee.” The NWPCA further provides that “[p]aid 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.”  Based on a 2013 Nebraska Supreme Court decision, unused PTO is to be treated the same as earned but unused vacation, meaning it must be paid out upon separation from employment.

            The trial court granted Longwells’ motion for summary judgment and dismissed the case, concluding that because plaintiffs did not bill any hours to clients, they could not have earned any PTO under the employee agreement.

            On appeal, the Nebraska Supreme Court agreed and upheld the dismissal of the employees’ lawsuit and relied on long-forgotten language of the NWPCA.  Specifically, the Court noted that the NWPCA imposes three requirements for a “wage” claim to be valid:

  1. It is compensation for labor or services;
  2. It was previously agreed to; and
  3. All the conditions stipulated have been met.

            Relying on the third prong of Section 48-1229 of the NWPCA, the Court concluded that because the plaintiffs did not bill clients, all of the conditions of the PTO policy in the employee agreement had not been met and therefore the PTO was not a “wage” for purposes of the NWPCA. 

            Confused?  So are we.

            Prior to the Court’s decision in 2013 giving a broad reading of the NWPCA, many Nebraska employers included conditions in their policies that had to be satisfied before a departing employee could receive payment for unused accrued vacation or PTO.  One common example is that the employee could not be terminated for “cause,” such as when an employee embezzled from the employer prior to being caught and fired.  Another common condition was that the employee had to give 2-weeks’ notice prior to resigning as a condition to being eligible to be paid for unused accrued vacation/PTO.  Most employers have jettisoned conditions like these given the Court’s liberal interpretation of the NWPCA. 

            Does the Drought decision breathe new life into the statutory requirement that “all the conditions stipulated have been met” before an employee can get paid for unused vacation?  Can employers now add conditions to their vacation and PTO policies to incent employees to leave on good terms if they wish to get paid for any unused vacation/PTO? 

            The simple answer is we don’t know yet.  Employers should exercise caution in making any changes to their policies that institute preconditions to payment of unused vacation/PTO to departing employees.  The Nebraska Legislature is in session and could amend the NWPCA to address the Drought decision and other lingering issues.  Or there could soon be another court case that tests the limits of the Drought decision. 

            Stay tuned.

Fahleson is an attorney with the law firm of Rembolt Ludtke LLP and may be reached at (402) 475-5100 or mfahleson@remboltlawfirm.com.  This article is provided for general information purposes only and should not be construed as legal advice. Those requiring legal advice are encouraged to consult with their attorney. 4844-2306-7826, v. 1