Newsletters

Employment Law Update - Winter 2008

Date: February 6, 2008

DLLR Changes Policy Regarding Payout of Accrued But Unused Leave

Based on a recent unreported decision from the Maryland Court of Special Appeals, the Maryland Department of Labor, Licensing & Regulation (DLLR) has changed its long-standing policy with regard to the payout of accrued but unused leave when an employee is terminated.

Under the former policy that had been in effect for a number of years, although an employee's accrued but unused leave was considered a wage and was thus payable as a terminal benefit when the employment ended, DLLR had recognized an exception to this rule. When an employer had a written policy known to the employee that provided for the forfeiture of any accrued leave on termination, that policy would apply and the employer would not be required to make a payout of the accrued but unused leave on termination.

Indeed, most Maryland employers have such a policy in their employee handbooks to provide for the forfeiture of any accrued but unused leave upon termination, especially if the employee is terminated for cause or quits without giving advance notice.

Now, under the new DLLR policy, the exception is no longer recognized. In fact, under the recent Maryland decision relied upon by DLLR, an employer's written policy that provides for the forfeiture of accrued leave benefits is considered invalid under the Maryland Wage Payment Collection Law. Let us take a closer look at the case that prompted the DLLR to change its long-standing policy.

Background Facts
Catapult Technology, Ltd., is a government contractor that provides technology and business services to the federal government. In late 2001, Catapult was awarded a contract to provide network services to the U.S. Department of Transportation (DOT). The contract consisted of an initial period of one year and four optional one-year renewal periods.

In late August, 2004, DOT informed Catapult that it did not intend to renew the contract for the next year and the contract would be terminated effective September 30, 2004. DOT had elected to award a new contract to Bowhead Information Technology Solutions (Bowhead).

On August 25, 2004, Roger Blevins, Vice President of Catapult, sent an email to the employees informing them that DOT was not going to renew the contract. The email stated that Catapult was negotiating possible terms and conditions for an alternative agreement to continue working with DOT.

On August 31, 2004, Catapult held an "all hands" meeting at which Blevins informed the employees that Catapult intended to appeal the loss of the contract to the Small Business Administration. Blevins indicated that he was highly confident that Catapult would win the appeal. Blevins also assured the employees that in the event the appeal was unsuccessful, Catapult was attempting to find positions for everyone affected by the loss of the contract.

He also reminded the employees of the provision in Catapult's employee handbook that required employees to provide two-week notice of resignation, along with a non-compete provision contained in their employment contracts.

The contract expired on September 30, 2004, as scheduled. Although Catapult had intended to place all of the employees on different job assignments, not all were given positions. Uncertain about their employment future,
several Catapult employees met with the new employer to discuss employment opportunities. After being offered new employment, the employees delivered resignation notices to Catapult on the afternoon of October 1, 2004.

The employees later learned that Catapult did not intend to pay them for their unused accrued leave because under the policy in the employee handbook, two-week notice must be given in order to receive payment for any unused accrued vacation leave.

On March 24, 2005, the employees filed a complaint in the Circuit Court for Montgomery County, Maryland, alleging violations of the Maryland Wage Payment and Collection Law (MWPCL). In the complaint, the employees alleged that Catapult was withholding compensation for unused accrued leave and, further, that Catapult's actions were willful and not the result of a bone fide dispute, triggering a claim for liquidated damages.

The trial court found that the employees' accrued but unused leave was a wage as defined in the MWPCL, and, therefore, could not be withheld or forfeited based on a provision in an employment handbook. The trial court also affirmed the jury finding that Catapult's withholding of unused accrued leave based on the handbook provision did not constitute a bona fide dispute, allowing the award of liquidated damages.

Dissatisfied with those holdings, Catapult appealed the trial court decision to the Maryland Court of Special Appeals. Catapult argued that even though the accrued leave could constitute a "wage" under MWPCL in certain circumstances, based on the clear language in its employee handbook and long-standing DLLR policy, accrued leave did not need to be paid out upon termination if the employees did not provide the required two weeks' notice of resignation. Catapult maintained that under existing Maryland law, an employer's personnel policies can determine whether a departing employee may receive compensation for accrued but unused leave.

The appellate court disagreed and found that Catapult's accrued leave was given "in remuneration for the employee's work and, therefore, constituted a wage," which, under Maryland law, could not be forfeited based on the contractual language between the parties.

In reaching this conclusion, the court relied on Medex v. McCabe, an earlier Maryland Court of Appeals decision that held that an employer could not condition the payment of a fully earned bonus upon the employee's continued employment. The appellate court also rejected Catapult's reliance on prior Maryland cases that had found that an employee was not entitled to accrued vacation where the employer had a policy of denial or a practice of non-payment under certain circumstances. The appellate court found that the prior Maryland case law was not instructive and was inconsistent with the more recent holding in McCabe.

Catapult, however, was more successful with its second argument that the trial court erred in assessing liquidated damages under the MWPCL. On appeal, the court agreed that there was insufficient evidence to permit the jury to find that Catapult did not act in good faith in withholding the payout of the accrued but unused leave. Thus Catapult avoided the award of liquidated damages.

Bottom Line
This case and the DLLR's change in position with regard to the payout of accrued but unused leave represent a significant change in existing Maryland law. Accordingly, all Maryland employers who have handbook provisions or other written policies that restrict or eliminate the payout of accrued but unused vacation, personal or other leave, should carefully review those policies and consider modifying them in light of this recent decision.

This case may ultimately be modified on appeal, but until that happens, DLLR has modified its prior position and now will require the payout of all accrued but unused leave even where the employer has a clear policy indicating that such leave is forfeited.

Dramatic Changes In The Enforcement Of State Discrimination Claims

In 2007, the Maryland Legislature made significant changes to the enforcement of discrimination claims under Article 49B of the Maryland Code Annotated.

Under the changes, which took effect on October 1, 2007, claimants can now file their Article 49B claims in Maryland circuit courts, request jury trials, and, if successful, receive enhanced remedies consistent with those recoverable under Title VII of the Civil Rights Act of 1964, as amended.

Prior to these recent amendments, a claimant seeking relief under Article 49B of the Maryland Code (which prohibits discrimination on the basis of race, color, national origin, religion, sex, age, disability, familial or marital status, genetic information, and sexual orientation) could file a claim with the Maryland Commission on Human Relations (MCHR). That claim would be investigated by the MCHR and, if warranted, the claim could proceed through an administrative hearing before an administrative law judge, and ultimately, the MCHR. There was no right to a jury trial in circuit court and the remedies available were limited to three years' back pay.

Under the new legislation, which was signed into law by Governor Martin O'Malley, an aggrieved current or former employee making a claim under Article 49B can file a civil action in circuit court and demand a jury trial. The civil action can be brought by the MCHR or by the individual. If the individual pursues the litigation, then he or she must first file a complaint with the MCHR and wait at least 180 days before filing the civil action. The civil action must be filed in the circuit court in the county where the alleged act of discrimination took place.

The new law also enhances the damages that are recoverable for violations of Article 49B. Compensatory damages are subject to the same statutory cap that exists under Title VII. For employers with between 15 and 100 employees, the cap for compensatory and punitive damages is $50,000; for those with more than 100, but fewer than 200, employees, the cap is $100,000; for employers with between 200 and 500 employees, the cap is $200,000; and for larger employers with more than 500 employees, the cap is $300,000.

These changes present new and significant challenges for Maryland employers. Rather than file a claim under Title VII that would, in most cases, wind up being litigated in the U.S. District Court, most savvy plaintiffs will now file the discrimination claim under Article 49B in the appropriate circuit court. Because a claim is based on state law rather than federal law (as in Title VII, the Age Discrimination In Employment Act or the Americans With Disabilities Act), the employer has no basis to move the state court action to federal court.

As most employers already know, litigating a claim in state court is very different from handling the claim in federal court. For starters, in state court, except in unusual circumstances, the cases are not specifically assigned to a particular judge. When motions are filed in a state court, the circuit court judge ruling on them may or may not be at all familiar with the case.

Second, it is generally more difficult to obtain a ruling on a dispositive motion (such as a motion to dismiss or a motion for summary judgment) in state court as compared to federal court. Many state claims will wind up going to trial, rather than being dismissed on a pretrial motion as is more common in federal court.

Third, the procedure and evidentiary rules in state court are somewhat different from those in federal court, oftentimes allowing the plaintiff more latitude than what might otherwise be permitted in federal court. For example, in state court, a party may supplement his or her deposition testimony with an affidavit-even one that is inconsistent with the deposition. This often occurs in responding to a summary judgment motion when the plaintiff seeks to modify prior deposition testimony. Under federal rules and decisions, such a practice is rarely permitted.

Finally, because of a large number of employment related claims that have been filed in the past, many of the federal judges here in Maryland are well-versed in the nuances of employment law, as well as the pronouncements from the Fourth Circuit Court of Appeals. State court judges, on the other hand, have not yet had the opportunity to become as immersed in employment litigation claims and are not necessarily bound by the decisions of the Fourth Circuit Court of Appeals.

Conclusion
The bottom line is that most plaintiffs will now present their discrimination claims in state court where it will be much more difficult for an employer to obtain a pretrial dismissal of those claims. As a result, your defense of those state law claims will have to be modified somewhat to reflect the likelihood that a motion to dismiss or summary judgment will not be granted and the claims will proceed to trial by a jury. Not surprisingly, the settlement value of these new state law employment claims litigated in state court is likely to rise significantly as the plaintiffs and their counsel become more confident that their claims will not be disposed of prior to a trial on the merits.

Most experienced employers know that facing a jury trial on employment matters can be very risky, especially since the statutory caps for compensatory and punitive damages have now been raised up to $300,000 for larger employers. Keep in mind that under Article 49B, as well as Title VII, a successful claimant is also entitled to recover costs and reasonable attorneys' fees incurred in pursuing the claims. In some cases, the costs and attorneys' fees award can be larger than the amount awarded by the court or the jury. Depending on how these new enforcement changes play out, it would not be surprising if many more Maryland employers decide that arbitrating employment disputes may be preferable to facing a circuit court judge or jury on those claims.

Maryland's New Living Wage Law -- 15 Things You Need To Know

As previously reported, Governor Martin O'Malley wasted little time in approving Maryland's Living Wage Legislation applicable to certain government contractors and subcontractors. In so doing, Maryland became the first state to enact such broad provisions for contractors who do business with the state.

Under the terms of the new law, which took effect October 1, 2007, workers for these state government contractors must be paid either $11.30 per hour or $8.50 per hour, depending upon where the work is performed. If the employer provides health insurance to its employees, then the employer may be entitled to receive a credit against the payment of the living wage for the hourly cost of the employer's share of the health insurance premium for that employee.

What is the Living Wage? Governor Martin O'Malley signed a bill into law establishing Maryland's Living Wage. The Living Wage Law requires certain contractors and subcontractors to pay minimum wage rates to employees working under certain state services contracts. The Living Wage Law will require the payment of the living wage of either $11.30 per hour or $8.50 per hour, depending upon the jurisdiction
where the services are performed. The state living wage does not apply to county and municipal contracts,
although some local governments, such as Montgomery County and Baltimore City, have their own living wage requirements. This law applies prospectively only to contracts awarded after October 1, 2007.
Does the living wage apply to all types of state services contracts? No. The Living Wage Law applies to state services contracts and subcontracts for services awarded on or after October 1, 2007. The procurement regulations define a contract for "services" as one for "the rendering of time, effort, or work rather than the furnishing of a specific physical product other than reports incidental to the required performance." The term "service contract" includes maintenance services and information technology services, but does not include construction, construction-related services, architectural and engineering services, energy performance contracts, supplies (including commodities and printing), real property, or the purchase of goods.
What state service contracts are exempt from the Living Wage Law? Under $100,000 in value; under $500,000 in value if the contractor has 10 or fewer employees; for services needed immediately to prevent or respond to imminent threat to public health or safety (emergency procurements); less than 13 weeks in duration; with a public service company; with a non-profit organization.
When is a prime contractor covered by the Living Wage Law? A contractor with more than 10 employees is covered when the state contract for services is valued at $100,000 or more. A contractor with 10 or fewer employees is only covered when the state contract for services is valued at $500,000 or more.
When is a subcontractor covered by the Living Wage Law? A subcontractor is only covered if the prime contractor for the state contract for services at issue is covered, and: the subcontractor is not otherwise excluded and has more than 10 employees and is performing services on a state contract for services valued at $100,000 or more; or a subcontractor is not otherwise excluded and has 10 or fewer employees and is performing services on a state contract for services valued at $500,000 or more.
How is contract value determined? Contract value is determined by adding the value of the base period plus all option periods.
What about a contractor (or subcontractor) that is not initially covered because of the value of the contract, but, due to a modification or change order, the contract value is increased and then exceeds the value thresholds? A contractor or subcontractor that is not initially covered due to value, e.g., a contract of $75,000, remains exempt. An agency may not artificially divide a procurement to avoid application of the Living Wage Law.
What about a contractor (or subcontractor) that is not initially covered because the contractor (or subcontractor) has 10 or fewer employees at the time they submit their bid or proposal, but that subsequently hires an 11th employee? A contractor/subcontractor that is not initially covered due to number of employees remains exempt on that contract.
In determining whether an employer has 10 or fewer employees, are part-time employees included? In other words, is an employer with 5 full-time and 6 part-time employees covered? Part-time positions will be added to equate to full-time equivalents (FTEs). A 40-hour week will be used as the standard, unless the contractor provides evidence that they define full-time by a lower number of hours, e.g., 35 hours. For example, under a 40-hour work week, two individuals working 20 hours each equate to one FTE.
Which employees must be paid a living wage? Covered prime contractors and covered subcontractors must pay the living wage to employees who: are 18 years old, or will turn 18 during the contract; work at least 13 consecutive weeks on the contract; and work at least one-half of their time during any week on the state contract.
For employees who turn 18 during the contract term, are they to receive a living wage from day one of the contract (before they turn 18) or from the day they turn 18? The obligation to pay the living wage applies from the start of the contract or the start of employment (whichever is later) for those covered employees who are under 18 but are anticipated to turn 18 while they are still employed on the contract.
For covered employees, must they be paid living wage for those hours they are not working on state contract business?
No. Living wage must be paid only for those hours spent on state contract business. There are two wage "tiers" established in Maryland -- Tier 1 includes Montgomery County, Prince George's County, Howard County, Baltimore County, Baltimore City, and Anne Arundel County. Tier 2 is comprised of the counties not included in Tier 1. The living wage rate for Tier 1 is $11.30 per hour, and the rate for Tier 2 is $8.50 per hour.
What if my business has operations in areas with two different wage tiers? Which rate should I pay?
The wage tier is determined by the area where services valued at 50 percent or more of the total contract value are performed. For example, if 45 percent of contracted services are performed in a Tier 1 area and 55 percent of the services are performed in a Tier 2 area, the wage for all eligible employees is Tier 2 because Tier 2 is the region where 50 percent or more (55 percent) of the services are performed.
Who is required to report payroll records? Any employer with a state contract for services subject to the Living Wage Law is required to submit payroll records for all employees performing work in connection with that state contract for services. Each contractor is responsible for ensuring that the subcontractors' payroll records are submitted in a timely manner.
Who is responsible for enforcement of the Living Wage Law? The Commissioner of Labor and Industry is in charge of enforcement. If there is a violation of the Living Wage Law, the Commissioner can order restitution to each affected employee, as well as damages. Employees also have the right to sue to recover wages.

Extended FMLA Benefits for Military Families

On January 28, 2008, President Bush signed into law the Support for Injured Service Members Act, which grants additional leave under the Family and Medical Leave Act to employees who have family members in the military.

The legislation creates two new categories of FMLA leave:

Active Duty Family Leave - Employees with a spouse, parent or child who is on or has been called to active duty in the armed forces may take up to 12 weeks of FMLA leave when they experience a "qualifying exigency."
Injured Service Member Leave - Employees who are the spouse, parent, child or next-of-kin of a service member who incurred a serious injury or illness on active duty in the armed forces, may take up to 26 weeks of leave in a 12-month period (including regular FMLA leave).

Employees may take injured-service-member leave intermittently, but must use it up within 12 months. There is no 12-month time limit on active duty family leave, which is more akin to traditional FMLA leave.

DOL is expected to issue proposed regulations within the next few weeks that will define "qualifying exigency" and interpret other aspects of the new leave requirements. Nonetheless, employers that are covered by the FMLA should make a good-faith effort to comply immediately with this new law.

One first step would be to inform your employees of the new leave entitlements. Further information can be provided once the DOL regulations are issued.