Back to Basics: Can U.S. Government Service Contractors Forfeit Employee Vacation Benefits?
“The beatings will continue until morale improves.”
--Monty Python
A client asks if they can forfeit vacation benefits for service employees working on U.S. government contracts. The contract is covered by the Service Contract Act (“SCA”), a prevailing wage law. The client has a general company vacation policy of use or lose the vacation. If the employees don’t use their vacation they forfeit the accruals if they quit, are fired, are laid off, or the contract comes to an end. The client wants to know if they can apply that policy to workers engaged to perform services on the government service contracts.
Assuming we are talking about SCA-required vacation benefits (usually 2 weeks of vacation after one year of service, and sometimes additional vacation for longer years of service) as specified in a wage determination, the short answer is that the benefit is nonforfeitable. It accrues and vests on the employee’s individual anniversary date of employment in a lump sum and is available for use thereafter in the next year. SCA employees earn their vacation in a lump sum on their anniversary date of employment and do not accrue it piecemeal over the course of a work year. Thus, if employment ends and there are unused SCA-required vacation balances, those unused SCA vacation balances must be paid out on termination of employment. It doesn’t matter whether the employment termination is voluntary, involuntary, due to employee fault, layoff, or contract end. For example, the employee cannot be asked later in October to pay back the SCA vacation benefit which accrued say on the February 1st anniversary date of employment. It is vested. And the worker must be paid for any unused SCA vacation balances.
Here is how the DOL Field Operations Handbook (“FOH”) puts the rules:
(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).
(e) Contractor liability for vacation benefits
The liability for an employee’s vacation is not prorated among contractors unless specifically provided for in a particular wage determination. The contractor by whom a person is employed at the time the vacation right vests (i.e., on the employee’s anniversary date of employment) must provide the full benefit required by the applicable wage determination on that date before the employee’s next anniversary date, before the current contract is completed, or before the employee terminates employment, whichever occurs first. Thus, vacation benefits must be complied with in full on an annual basis. Any unused vacation benefits may not be carried over from year to year. See 29 CFR 4.173(c) - (d).
FOH 14j03(d) and (e).
Of course, if we are discussing vacation benefits in excess of the SCA, it can be a different rule. Say you provide benefits in year one of employment or you provide 4 weeks of vacation while the SCA WD only requires 2 weeks. In that case, the excess vacation is a non-SCA benefit. It can be treated differently and perhaps subject to a general company policy on use of leave. Accordingly, it possibly can be forfeited or required to be paid back, if permitted by state law. However, watch out for state wage laws and regulations, particularly for California which requires pro-rata vacation benefits.