Vacations and the weekends – it’s what we often work for. But what happens when a termination ends the work and there is unused vacation time?
A number of employers have been updating their employee handbooks and policies. In doing so, these employers often raise questions about both vacation pay and severance packages. More specifically, when is an employer obligated to pay accrued vacation pay and what obligations, if any, are there for paying severance to an employee.
Overview of Michigan’s Wage & Fringe Benefits Act
The starting point for both questions is the Michigan Wage & Fringe Benefits Act, MCL 408.475(1).
As to severance pay, an employer must pay to an employee voluntarily leaving employment or discharged from employment all wages earned and due, as soon as the amount can (with due diligence) be determined. MCL § 408.475(1) and (2).
In other words, under both circumstances (a voluntary or involuntary termination) an employer is not required to pay an employee any wages that are not earned or due.
This is important where an employee provides two weeks notice before ending his or her employment relationship, but the employer elects (usually for business reasons) to terminate the individual prior to the running of the two week notice period. Under those circumstances, there is no requirement to pay an individual for the entire notice period (e.g., two weeks) for any wages that are not earned or due to be paid, assuming there is no employment or collective bargaining agreement to the contary.
Payment of Accrued Vacation under Michigan Law
The other common question Michigan employers have asked is if a person’s employment is terminated, under what circumstances must that person be paid for any vacation time that may have accrued?
The short answer is that an employer is only legally required to pay an individual accrued vacation time if the applicable employment agreement or policy provides for it. Specifically, the Michigan Wage & Fringe Benefits Act provides that an employer must pay fringe benefits to or on behalf of an employee in accordance with the terms set forth in the written contract or written policy.
Additionally, Michigan’s Wage & Fringe Benefits Act defines fringe benefits as compensation other than the wages or salary paid to an employee and specifies such items as vacation time and sick time. MCL 408.471(e).
Creating Incentives to Provide Advance Notice Before Terminating Employment
With the preceding in mind, Michigan employers actually have opportunities for implementing termination policies and procedures that encourage individuals to provide advance notice (e.g., two weeks notice) before ending their employment relationship.
This is because under Michigan’s Wage & Fringe Benefits Act it is possible to draft employee termination provisions that create a financial incentive to provide the requested notice. Consider for example that with proper drafting, employers could make payment of accrued vacation time contingent upon providing a designated notice before ending the employment relationship and failing to provide such notice forfeits any right to accrued vacation pay.