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Unused Vacation Time Cannot Count Towards Public Employee Pension Benefit

Municipal collective bargaining agreements and employment contracts are replete with provisions authorizing or requiring certain enhancements to employees’ wages and salaries. Each of these enhancements is arguably part of the employee’s compensation package, and the question thus arises whether they are part of the employee’s “regular compensation,” and thus “pensionable” under the laws governing public employee contributory retirement systems. The answer, it turns out, may depend on how the enhancement program is formulated and administered.

The Supreme Judicial Court has ruled that a public employee’s unused vacation time, paid out through an annually elected vacation buyback, cannot count toward the employee’s pension benefit calculation. This ruling, O’Leary v. Contributory Retirement Appeal Board, invalidates a guidance memorandum from the Public Employee Retirement Administration Commission (PERAC), issued in 2012, that allowed for such allocation.

Public employees in Massachusetts receive a pension based on a percentage of the highest average consecutive three-year period of their “regular compensation” while employed. While there are more than 100 local retirement boards that administer public employee pension benefits, PERAC is the state agency that oversees these retirement boards. PERAC’s memorandum suggested, in part, that such vacation buyback payments could be part of an employee’s regular compensation if they are: (1) part of the employee’s base salary or other base compensation; and (2) not unpredictable or of limited duration. Many of the local retirement boards, however, did not follow the guidance in PERAC memorandum, including Lexington’s.

Lexington police officer Joseph O’Leary chose to convert 10 unused vacation days into wages each year from 2008-2015 through a provision in his collective bargaining agreement that allowed for such election (the vacation buyback). Prior to his retirement, O’Leary asked the Lexington retirement board to count the vacation buyback payments towards his regular compensation for purposes of retirement benefit calculation. O’Leary sued when the Lexington board denied his request. The Superior Court ruled against O’Leary holding that the vacation buyback payment was not regular compensation for purposes of calculating his retirement benefit.

The SJC considered this matter to be one of strict statutory interpretation. It had previously held that the term “regular compensation” as used in G.L. c.32, the statute governing retirement systems and pensions, meant ordinary, recurring, or repeated payments that were not inflated by “extraordinary ad hoc” amounts, such as bonuses or overtime payments. The payments at issue here, via the vacation buyback, were chosen by O’Leary. While he elected to receive them for several years, the payments were not, by their nature, “recurrent” or “repeated”—at any point O’Leary could have chosen to alter the number of vacation days counting towards his compensation or elected not to sell back the time.

The SJC recognized that the public employer cannot predict, from year to year, whether the employee will participate in the vacation buyback program or at what amount. Instead of constituting part of regular compensation, the Court concluded, the vacation buyback wages were an amount derived from a “salary enhancement” plan. Thus, the SJC invalidated PERAC’s memorandum to the extent that it allowed wages derived from this type of vacation buyback to be part of an employee’s regular compensation for purposes of retirement benefit calculation.

Further, the SJC held that its opinion had retroactive effect. It rejected O’Leary’s argument that those who relied on the PERAC memorandum would be adversely affected. The SJC noted that the Lexington board and several agencies had correctly interpreted the statute. There was no evidence presented that retirees whose pensions were calculated based on the 2012 memorandum would be forced to repay any improper amounts or be subject to a recalculation, particularly since Massachusetts law provides that, upon request, retirement boards may waive repayment or recovery of amounts from members who were inadvertently paid more than what they were entitled to.

This case reminds municipal employers and local retirement boards about the importance of properly considering regular compensation, as opposed to salary enhancements, for purposes of accurate retirement benefit calculations.


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