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Tennessee Court of Appeals: Vacation is a Matter of Policy

PTO Paid Time Off Clock Vacation Hours Leave 3d Illustration

In Michelhaugh, et al. v. Consolidated Nuclear Security, LLC, Case No. B8LA0053 (August 11, 2020), the Tennessee Court of Appeals addressed a dispute over how and when vacation time was earned. A Department of Energy contractor, Consolidated Nuclear Security, LLC (“CNS”), had replaced another contractor, Babcock & Wilcox Technical Services (“B&W”). CNS hired B&W’s former employees expressly as employees “at will”.

Under B&W’s vacation policy, salaried employees hired before January 1, 1996 and on the payroll on December 31 of a given year had the right to receive all of the next year’s vacation time up-front at the start of each year. On December 11, 2014, CNS issued a new vacation policy replacing B&W’s policy. Under the CNS policy, labeled a paid time off (“PTO”) policy, effective January 1, 2015 employees would accrue PTO hours by working each pay period, the number of PTO hours based on years of service. CNS informed employees of the change prior to December 31, 2014.

Plaintiff’s sued, seeing class action certification, claiming employees had earned their 2015 vacation time by working through 2014 and that CNS deprived them of that earned vacation time when it changed the vacation policy. CNS responded that Plaintiffs did not actually earn vacation time by working throughout the previous year. Instead, B&W had simply advanced employees all their vacation time without requiring them to first earn that vacation.

The trial court granted summary judgment to CNS and denied class certification, ruling that the former B&W employees had not been deprived of any earned or vested vacation when CNS replaced the B&W vacation policy. The Court of Appeals affirmed. The Court of Appeals held that CNS had the right to prospectively change its vacation policy, and that by doing so before December 31 when Plaintiffs’ 2015 vacation might have vested, and informing employees in advance, plaintiffs had not been deprived of their 2015 vacation benefits.

The Court explained that in Tennessee “the agreement between an employer and its employee determines whether an employee’s compensation includes vacation time, when that vacation accrues, and whether an employee is entitled to vacation upon termination.” … “The Tennessee Supreme Court has held that an employer had no obligation to provide an employee with paid time off ‘in the absence of its agreement to.’” “Further, at will employees—such as Plaintiffs—have no contractual right to demand that an employer continue any past practice.” Additionally, CNS had the right under Tennessee law to prospectively change its vacation policy and, because it did so “before any of Plaintiffs’ 2015 vacation time would otherwise have vested on December 31,” CNS did not deprive Plaintiffs of any vested or earned compensation. The Court noted that, had CNS not made the change, Plaintiffs would earn double vacation time in a single calendar year.

Practice Tips:

In Tennessee, entitlement to PTO (or vacation time), during or at the end of employment, is strictly a matter of the employer’s policies. Therefore, employers must have clearly written PTO policies, specifying how and when employees earn and may take PTO. Any changes to those policies must be communicated to employees before the changes are made.

In recent years, many employers have switched from policies under which employees earn next year’s vacation time by working the previous year to “earn as you go” policies where employees earn PTO by working designated periods of time during the new year. Some such policies permit employees to “borrow” from the current year’s PTO before actually earning that time. Employers must carefully and accurately record employees’ entitlement to and use of PTO, including any borrowing of such time. Failure to so so can lead to confusion and legal claims, particularly at the end of employment when the employee wants to be paid for earned but unused PTO.

If you’re an employer in Tennessee or elsewhere developing a PTO policy or facing a claim of improper denial of PTO during or at the end of employment, obtain professional and thorough legal assistance by contacting the Law Offices of Cary Schwimmer at 901-753-5537 or visiting our website at schwimmerfirm.com. Our office address is 1661 International Place Drive, Suite 400, Memphis, TN 38120.

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