Vacation Buy-Back and the FLSA

Today’s FLSA Question: Our employment contract contains a provision entitled “annual vacation buy-back,” which allows firefighters to cash out up to 100 hours of unused vacation hours annually. The hours are paid at the firefighter’s hourly rate at the time of buy-back. Does this “buy-back” money for unused vacation time need to be included in the firefighter’s regular rate?

Excellent question. Always remember the general rule: The FLSA requires virtually all remuneration to be included in the regular rate, with only a few narrow exceptions. Neither the FLSA nor the Department of Labor (DOL) regulations lists “annual vacation buy-back” as one of the few exceptions. However, the DOL and several courts have found lump sum payments for unused vacation time does not need to be included in the regular rate. Since the FLSA and regulations do not include annual vacation buy-back as one of the regular rate exceptions; how has the DOL and various courts across the country justified excluding it from the regular rate?

Vacation Time

The money a firefighter receives for not working while using a vacation day is clearly excludable from the regular rate. 29 U.S.C. §207(e)(2) of the FLSA allows employers to exclude “payments made for occasional periods when no work is performed due to vacation” from the regular rate. Additionally, DOL regulations found at 29 C.F.R. §778.219(a) state employers can exclude vacation payments from an employee’s regular rate because it is not considered “compensation for working”. This makes sense. It seems unreasonable to think an employee could increase his or her regular rate while utilizing paid vacation time.

Lump Sum – Vacation Buy-Back Options

But here, we are referring to extra money paid to an employee for not using vacation time. These types of provisions are fairly common in many collective bargaining agreements. Surprisingly, the courts and the DOL have consistently maintained that these lump-sum payments do not need to be included in the regular rate. In essence, they have viewed this money just like money an employee receives when using vacation time and not working.

This may seem counter-intuitive to some. Typically, money that an employee receives for working (remember, the employee worked-hence the unused vacation time), needs to be included in the regular rate. But under these narrow circumstances, it may not.

Now, back to the question. Most likely the money paid under the “annual vacation buy-back” in your contract does not need to be included in the regular rate, but you should run this by your local counsel. A thorough examination of all the facts as well as state laws would be needed to make the ultimate determination.