SJC Concludes that Payments Made In Lieu of Vacation Time Are Not Included in Pension Calculation
On August 11, 2022, the Supreme Judicial Court issued a decision in Joseph O’Leary v. Contributory Retirement Appeal Board, No. 13229 (2022), holding that payments made in lieu of unused, accrued vacation time are not “regular compensation” for the purpose of calculating a public employee’s retirement allowance under the Contributory Retirement Law, G.L. chapter 32. The SJC invalidated prior guidance from the Public Employee Retirement Administration Commission (PERAC), which many employees had relied on to argue that payment for unused vacation time should, under certain circumstances, be considered as regular compensation.
The employee was a police officer who, pursuant to a collective bargaining agreement, was eligible to convert up to ten days of vacation time every year into compensation. He made this election every December and the compensation was paid biweekly in the next fiscal year. When the retirement board rejected his argument that these payments constituted “regular compensation” for purposes of calculating his retirement allowance, he filed an administrative law appeal which eventually made its way to the SJC.
The SJC applied the definition of “regular compensation” in G.L. c. 32, §1, i.e., “compensation received exclusively as wages [i.e., the base salary or other base compensation of an employee,] by an employee for services performed in the course of employment for his employer.” The court concluded that these payments are excluded from “regular compensation” because they are not “recurrent or repeated” but repeat only upon specific election by the employee during the election period, even if the employee has consistently made the election. The court also held that these payments are derived from salary enhancements or salary augmentation plans which will recur for a limited or definite term and are therefore explicitly excluded from the definition of “wages” in section 1 of the Law.
This decision effectively overrules an advisory memorandum that PERAC issued in 2012 to local retirement boards. PERAC had advised that payments for unused vacation time could be included in pension calculations if they met certain threshold requirements.
The O’Leary decision is important for employers because it defines which payments are included in calculating an employee’s retirement allowance. Employers should be aware that where employees have the option to elect to receive certain payments, those payments will not be used in determining the amount of the retirement allowance if the payments are “elective rather than naturally recurring”.
If you have any questions about the content of this update, please contact us. We are pleased to assist public employers who may be confronted with questions regarding the Law, including involuntary retirement applications, employers’ rights in the retirement process, and collective bargaining issues that may implicate the Law.
This update is provided for informational purposes only and should not be considered legal advice.