Must Tennessee Employers Pay Departing Employees For “Accrued” But Unused Leave?

I am from time to time asked by both employers and employees if a Tennessee employer must pay an employee for her “accrued” but unused leave days when she quits or is discharged. There seems to be an assumption by most people who ask the question that if the paid leave days are accrued as opposed to advanced, the employee must be paid for them. Surprisingly, the answer to the question is not what most people expect.

When addressing this issue it is important to first understand what is meant by the term “accrued” leave. There are two ways paid leave days are extended to employees. The first is to advance it for use during a specific period of time (generally a calendar year). Advanced leave is essentially a gift in that it is provided on the front end of the period without having to be earned prior to using it. Accrued leave on the other hand must be earned before it can be used. Generally, there is a formula by which paid leave days are earned on a monthly basis. For instance, if an employee accrues 12 paid vacation days a year, she will accrue 1 day for each month of service.

There has been a generally held belief over many years that when an employee accrues vacation or sick days, they are an earned and vested benefit which cannot be forfeited upon leaving employment, such that the employer must compensate the departing employee for them. That belief was fueled by a position taken by the Tennessee Department of Labor in 2000 to that effect. In 2006, however, the Tennessee Attorney General was asked to weigh in on the issue through an Attorney General opinion (Opinion No. 06-169).

The question centers upon a provision of the Tennessee Wage Regulation Act, Tenn. Code Ann. 50-2-103(a)(3), which provides:

… The final wages of an employee who quits or is discharged shall include any vacation pay or other compensatory time that is owed to the employee by virtue of company policy or labor agreement. This subdivision (a)(3) does not mandate employers to provide vacations, either paid or unpaid, nor does it require that employers establish written vacation pay policies.

Construing this language, the Tennessee Attorney General found that it only requires employers to pay departing employees for unused “vacation pay or other compensatory time” if a work policy (such as an Employee Handbook), labor agreement or employment contract requires it to do so. In other words, only if the employer agrees in writing to pay it.

It is important to bear in mind that Tennessee Attorney General Opinions are not binding legal authority. Ultimately, Tennessee courts hold the opinion that counts. To date, however, no Tennessee appellate court has addressed this precise question since the Attorney General Opinion. Interestingly, a handful of contrary court decisions predating the AG opinion exist, but they are no longer considered authoritative. Thus, until a Tennessee court says otherwise, the 2006 Attorney General opinion is accepted as the controlling authority on the issue and accrued but unused vacation/sick days need not be paid upon employee departure unless the employer agrees to do so.

While the legal authority that does exist on this subject is quite favorable to employers, cautious employers that wish not to pay for unused leave when an employee departs should make certain to have appropriate policy statements in place informing employees of that fact. If you are an employee who recently lost your job and are not being paid for your unused vacation, sick, or PTO days, you will have no basis to claim entitlement to payment unless you can point to some written statement or promise made by your former employer that you will be paid for unused leave.