In a collective action under the Fair Labor Standards Act (FLSA), the Tenth Circuit Court of Appeals recently joined the Eighth Circuit and the Department of Labor in holding that sick leave buy-backs are included in the FLSA regular rate, but vacation leave buy-backs are not. Chavez v. City of Albuquerque, No. 09-2274 & 09-2288, 2011 U.S. App. LEXIS 622 (10th Cir. Jan. 12, 2011).

In Chavez, the plaintiffs, 780 former and current employees of the City of Albuquerque, a municipal corporation, filed a multi-count complaint on behalf of themselves and all others who had previously worked or were currently employed, alleging that the City improperly calculated its employees’ wage, overtime, and bonus pay in violation of the FLSA.

After motions for summary judgment and a bench trial, the U.S. District Court for the District of New Mexico ultimately found for the City on all counts save for one – the plaintiffs’ claim that the City failed to include vacation and sick leave buy-backs in its calculation of the FLSA regular rate. On review, the Tenth Circuit agreed with the district court that sick leave buy-backs must be included in the FLSA regular rate, but rejected the court’s finding that vacation buy-backs should also be included. Accordingly, the Tenth Circuit reversed the district court’s finding on this issue and affirmed the rest. 

A vacation or sick leave buy-back program typically affords an employee the opportunity to cash-out his or her unused vacation or sick leave benefits. Such programs incentivize employees to work rather than take unnecessary vacation or sick leave (in order to retain the pay benefits). Employers also utilize these programs to save on the cost of overtime and per-diem workers. In Chavez, the City’s employees were subject to such a vacation and sick leave buy-back program. However, when the City would determine its employees’ overtime rate by calculating the employees’ regular rate to include “straight time” and add-on payments, it did not include vacation or sick leave buy-backs.

In its analysis, the Tenth Circuit first noted that pay for vacation and sick leave actually taken is not part of the FLSA’s regular rate calculation. Regarding the issue that arises when an employee works instead of taking his of her vacation or sick leave day, the court agreed with the Department of Labor’s position on the matter – vacation buy-back is not part of the regular rate, but sick leave buy-back is. According to the Department, vacation leave pay should not be included in the regular rate because it is not compensation for actual work, whereas sick leave pay should be included in the regular rate because it is analogous to an attendance bonus.

There is somewhat of a circuit split as to whether sick leave buy-backs should be included in the regular rate. For instance, the Sixth Circuit has held that sick leave buy-backs should not be included because “awards for nonuse of sick leave are similar to payments made when no work is performed due to illness...” Featsent v. City of Youngstown, 70 F.3d 900, 905 (6th Cir. 1995). Thus, Chavez represents the Tenth Circuit’s split from the Sixth Circuit, and joining with the Eighth Circuit and Department of Labor, in holding that sick leave buy-backs should indeed be included in an employer’s calculation of the FLSA regular rate.

This entry was written by Milton Castro.

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