Carry Forward of Vacation Benefits Under Service Contract Act – No can do!

“You know it’s time for a vacation when you start looking like the person on your driving license…. “

--Anonymous

Say you are a model employer and service contractor for the Federal Government. You have a vacation plan, and you let your employees bank and carry forward unused vacation, and permit them to schedule their time off as they please. They are not required to use their vacation, nor is unused vacation involuntarily cashed out annually. Management is concerned about worker morale. They want to give the workers the maximum flexibility in their use or accumulation of vacation benefits. After all, the workers often work alongside federal Government employees who retain significant rights to accumulate vacation that can be credited to their retirement upon leaving federal service. However, management must comply with the more inflexible requirements of the Service Contract Act (“SCA”), a federal law which mandates the provision of vacation benefits for federal service contractors. Can the two impulses be squared?

I know workers often value the accumulation of paid leave and flexibility more than the money. But DOL has a show-me-the-money rule here. DOL thus requires annual use or cash out of the vacation benefit under the SCA. DOL ostensibly will not even allow SCA covered workers to elect, even at the individual worker’s own option, to cash out or carry forward the unused vacation.

Try to see this from DOL’s perspective. They want to be employee friendly, but they don’t think the carry-forward of leave balances is so employee-friendly. The carry-forward vacation is just an unfunded benefit with no out-of-pocket cost to the employer. In addition, DOL takes its regulations literally, and they expressly require an annual payout in the regulation. See 29 C.F.R. 4.173(c)(2). From where they sit, the annualization rule makes it possible for DOL to track the vacation benefit. If workers are permitted to carry their vacation benefits forward, DOL will have no way of knowing if an SCA benefit was forfeited if the employee no longer is working on an SCA contract in the future. So how can they audit it? Finally, annualization also helps control large accumulated leave balances that might go unpaid in bankruptcy proceedings in the future. The Bankruptcy Code only protects a portion of accumulated paid leave claims and gives it priority. The rest is just unsecured debt which may never be paid.

Here is DOL’s summary of the rule that is published in their Field Operations Handbook (“FOH”):

(d) Accrual or vesting and payment of vacation benefits

Where a prevailing wage determination specifies “1 week paid vacation after 1 year of service with a contractor or successor,” an employee who renders the 1 year of service continuously becomes eligible for the 1 week paid vacation (i.e., 40 hours of paid vacation, unless otherwise specified in an applicable wage determination) upon his/her anniversary date of employment and upon each succeeding anniversary date thereafter. There is no accrual or vesting of vacation eligibility before the employee’s anniversary date of employment, and no segment of time smaller than 1 year need be considered in computing the employer’s vacation liability, unless otherwise specifically provided for in a particular wage determination. The vacation benefits need not be provided by the employer on the date of vesting.  However, the required benefit must be furnished before the employee’s next anniversary date, before the current contract is completed, or before the employee terminates employment, whichever occurs first. See 29 CFR 4.173(c)(2).

FOH 14j03(d). The vacation vests on the anniversary date. The employee has one year to use it in a bona fide leave plan. If it doesn’t all get used, the balance must be cashed out immediately after they get their next tranche of vacation benefits. That is the rule. Employers cannot count on getting an informal exception to that rule. It is possible an individual DOL investigator may look the other way, or warn you to change your practices, or just make you pay off the excess balances in the leave account. But it is just as possible that they will punish you for giving more flexibility to the workers. No good deed goes unpunished. Large back benefit damages may arise pursuant to the carry forward provisions of a SCA covered vacation plan. Employees end up being furnished more than the minimum vacation benefit in one year, and less in the earlier period. DOL may go after the deficit and might not give credit for the excess. 

You ask if there is a minimum that has to be paid out. The answer is yes – the minimum is the  benefit required to be paid that worker under the SCA wage determination. If that is one week of vacation, that is the minimum; if more is required by the wage determination, like 2 to 5 weeks of vacation after accounting for the employee’s length of service, the minimum may be higher. It depends on the wage determination and the employee’s length of service. If you do voluntarily furnish more vacation than the minimum, the excess vacation benefit beyond the SCA requirements can be carried forward provided that you aren’t using it quarterly as a credit to SCA H&W benefits.

The irony here is that Federal Government employees, including the DOL investigators, can build up their leave, carry it forward almost indefinitely, don’t have to use it, and can even get credit for it towards their length of service when they retire. It is hypocritical, but it is what it is.

Of course, if the employer cashes out the leave, nothing prevents the employer from subsequently giving the employees leave without pay; and, thus, if the workers get paid out for unused leave earlier on their anniversary date of employment, they are in essence made financially whole for the unpaid leave in advance.