Non Profit Report - Spring 2008
Payout Of Accrued But Unused Leave At Termination: The Rules Change -- Yet Again!
By: Kevin C. McCormick, Esq.
Last fall, the Maryland Department of Labor, Licensing and Regulation (DLLR) changed its long-standing policy with regard to the payout of accrued but unused leave when an employee terminates employment.
Under the former policy, an employee's accrued but unused leave was considered a wage and was payable as a terminal benefit when the employment ended. However, DLLR recognized that when an employer had a written policy known to the employee that provided for the forfeiture of any accrued leave upon termination, the policy would apply and the employer would not be required to make a payout of the accrued but unused leave to a terminating employee.
Late in 2007, DLLR announced that it was changing its long-standing position in cases in which the employer has a clear written policy that provides for the forfeiture of accrued but unused vacation benefits. According to DLLR, an employer could no longer restrict the payout of accrued but unused vacation leave. Instead, the employer had to pay the value of the leave to the terminating employee regardless of any written policy the employer may have. Based on this change in enforcement policy, many Maryland employers modified their prior policies regarding the payout of accrued vacation leave.
Apparently concerned with DLLR's abrupt change in policy, the Maryland Legislature passed emergency legislation (Senate Bill 797) that reversed DLLR's policy change and allows an employer to refrain from paying any accrued but unused leave to a terminated employee if (1) the employer has a written policy that limits the payout of accrued leave to employees, (2) the employer has notified the employees of this policy, and (3) the employee is not entitled to payment for the accrued leave at termination under the terms of the employer's written policy.
The Governor signed the legislation on April 24, 2008, and it immediately became effective on that date.
Background
So why did DLLR change its policy regarding accrued but unused leave in the first place?
DLLR based its policy change on a Maryland decision in which an employer's written policy that provides for the forfeiture of accrued leave benefits was considered invalid under the Maryland Wage Payment Collection Law. The following is a description of the case that prompted the DLLR to change its long-standing policy.
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 that 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 a two week notice of resignation.
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 representatives of Bowhead 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 weeks' 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 MWPCL. In the complaint, the employees alleged that Catapult was withholding compensation for unused accrued leave.
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.
Dissatisfied with this result, Catapult appealed the trial court's 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.
Bottom Line
Now that the Governor has signed the legislation into law to reverse DLLR's policy change, Maryland employers can resume their prior practice of limiting the payout of accrued but unused vacation benefits upon termination. Such a policy must be clearly stated in writing and provided to employees in advance.
Charitable Immunity in Virginia
By: Eileen Morgan Johnson, Esq.
A recent unanimous decision by the Virginia Supreme Court makes it more difficult for charities to claim charitable immunity as a defense to suits alleging personal injury or other tort claims. In University of Virginia Health Services Foundation v. Morris, decided on February 29, 2008, the court ruled that an organization that qualified as a charity for federal tax purposes was not entitled to the protection of charitable immunity.
Background
The University of Virginia Health Services Foundation (HSF) was formed to improve the patient billing and collection process of the University of Virginia Medical School. HSF provides medical care and treatment to all persons, regardless of their ability to pay or whether they have any outstanding debts to HSF. Patients are charged on a sliding scale based on their ability to pay, and HSF regularly initiates collection actions against those determined to be able to pay something but who do not pay their bills. For the year in question (2005), HSF provided approximately $7 million in free care to indigents. Of that, the Commonwealth reimbursed HSF approximately $5.5 million, leaving HSF with a loss of $1.5 million.
After paying its expenses, HSF's net revenue is transferred to the medical school. Physicians are employed by HSF and the medical school, and they receive part of their salary from each entity. A compensation system rewards physicians for their teaching, research and providing medical services in the medical school's hospital.
Three cases were consolidated on appeal. One involved the death of a child. In the other two cases, one patient suffered permanent blindness and the other suffered a variety of permanent injuries at birth. Two judges on the first appeals court had ruled differently on the question of whether HSF was entitled to the benefit of charitable immunity.
Virginia Law
The doctrine of charitable immunity goes back centuries. Its original intent was to shield charities that provided services to the poor and sick. In effect, the courts and legislatures made a value judgment - the work of the charities and their ability to provide charitable services without fear of lawsuits was more important to society than the harm they may occasionally cause. Over the years, exceptions and exclusions have limited the availability of charitable immunity in many jurisdictions.
Virginia offers limited charitable immunity. A charity may qualify for immunity from liability for acts of ordinary negligence, but there are conditions that must first be met. The charity is only immune from claims brought by those who were beneficiaries of the charity; there is no immunity for claims brought by others. The charity may be liable for ordinary negligence in the selection and retention of its employees or agents who caused the harm. A charity is not immune for acts of gross negligence or "willful or wanton" negligence.
In order to successfully claim the benefits of charitable immunity, the charity must prove two distinct elements. First, the charity must prove that it is organized with a recognized charitable purpose and that it operates in accord with that purpose. Second, the charity must prove that the person claiming harm was a beneficiary of the charity at the time of the alleged injury. If the organization's articles of incorporation set forth a charitable purpose, there is a rebuttable presumption it operates as a charitable institution in accordance with that purpose. This presumption may be rebutted if the manner in which the organization actually conducts its affairs is not in accord with its charitable purpose.
The Virginia Supreme Court articulated the test for charitable immunity in an earlier case, Ola v. YMCA of South Hampton Roads, Inc. In Ola, the court identified ten factors that it considered indicative of whether a charitable organization operates in fact with a charitable purpose:
(1) Does the entity's charter limit the entity to a charitable or eleemosynary purpose?
(2) Does the entity's charter contain a not-for-profit limitation?
(3) Is the entity's financial purpose to break even or earn a profit?
(4) Does the entity in fact earn a profit, and if so, how often does that occur?
(5) If the entity earns a profit (a surplus beyond expenses) must that be used for a charitable purpose?
(6) Does the entity depend on contributions and donations for a substantial portion of its existence?
(7) Is the entity exempt from federal income tax and/or local real estate tax?
(8) Does the entity's provision of services take into consideration a person's ability to pay for such services?
(9) Does the entity have stockholders or others with an equity stake in its capital?
(10) Are the directors and officers of the entity compensated and if so, on what basis?
The Ola court stated that these ten factors are not exclusive and no one factor determines whether or not the entity qualifies for charitable immunity.
The Court's Decision
The court relied primarily on four factors in reaching its conclusion that HSF does not operate in fact with a charitable purpose: (1) HSF was created to correct billing and collection problems rather than improving
the quality of medical care or other charitable purposes; (2) the cost of HSF's charitable work is substantially disproportionate to its level of revenues; (3) HSF's incentive payment structure for physicians is functionally a profitbased bonus system, much like a for-profit enterprise; and (4) HSF does not accept charitable gifts. While recognizing that it was commendable that HSF provides quality medical care to medically indigent patients, the
court found that HSF was operated "in a manner calculated to produce a profit or gain" and thus was not entitled to charitable immunity.
What does this Mean for Virginia's Charities?
Any time a charity is denied the benefit of charitable immunity it makes it that much more difficult for the next charity to successfully claim that it is entitled to the protections offered by charitable immunity. The four objections raised by the Virginia Supreme Court do indeed give cause for concern.
- Objection #1: HSF was created to correct billing and collection problems. The Virginia Supreme Court does not seem to understand the concept of a supporting organization and the special role it plays. HSF is a supporting organization of the University of Virginia. Its charitable purpose is to support the university by employing physicians who teach at the medical school, perform research and provide medical services to the community. Most supporting organizations are created to provide some service to the organizations they support. It is often more cost effective or efficient for supporting organizations to provide core services - accounting, human resources, property management, etc. - to their supported organizations. The supported organizations in turn can focus on fulfilling their charitable mission.
- Objection #2: The cost of HSF's charitable work is substantially disproportionate to its level of revenues. While a $1.5 million loss due to providing medical care to indigents may be a small portion of HSF's total revenues, it is still $1.5 million in free medical services to the poor. If $1.5 million in charity care is not enough, how much more is required?
- Objection #3: HSF's incentive payment structure for physicians is functionally a profit-based bonus system, much like a for-profit enterprise. For the past decade or more, nonprofits have experimented with salary structures that would allow them to attract and retain talented staff in a tight job market. The federal tax code and regulations provide penalties (in the form of intermediate sanctions) for those charitable organizations that do not pay reasonable compensation. While the justices may have been dismayed at the disparity between their incomes and those of the doctors employed by essentially another state agency, that does not mean that HSF is not a charity.
- Objection #4: HSF does not accept charitable gifts. This may in fact be the crux of the problem. Charities are expected to accept charitable gifts. The arrangement between HSF and the University of Virginia that HSF would not accept charitable gifts but would instead direct them to the medical school may have been the final straw for the court. Without accepting charitable gifts, HSF just did not look like a charity.
Conclusion
In addition to reviewing their insurance coverage annually, Virginia charities may also want to look at the ten
factors listed in Ola and determine how they would fare if a court reviewed their activities. While qualifying for
charitable immunity alone may not be a sufficient reason to change the organization's activities, those charities most likely to be the defendants in a lawsuit should not assume that their charitable tax status will guarantee them immunity.