Do Buybacks for Vacation, Sick Days Mean Bigger Paychecks?

Key Development:Annual leave buyback amounts may not need to be included when calculating regular rate of pay for overtime.

Potential Impact:Certain programs that differentiate between vacation and sick leave could be liable for extra pay.

By Keith M. Hill  

“I thought this leave buyback program would be a great idea, but it's not reflected in my paycheck,” Jerry, a firefighter, said to his co-worker, Dean. “I'm being paid less than I thought, even with all the overtime I've been working.”

“I've been working overtime too, and I have a lot of unused leave time,” Dean said. “The problem is the buybacks are not being included in our regular rate of pay, which affects the calculation of our overtime.”

“I think these amounts should be included in our paychecks,” Jerry said. “This problem needs to be resolved.”

FACTS: A group of firefighters, emergency medical technicians, and paramedics employed by a municipal fire department filed a lawsuit against the employer, claiming that the city failed to properly calculate overtime wages.

The city's leave program replaced separate sick and vacation leaves with a combined annual leave program. The first six hours in each pay period accrued automatically as usable annual leave, while the rest accrued in a restricted account for annual leave.

The hours in the restricted account, which could not be used during the year in which the time was accrued, were rolled into the annual leave account at the end of the year. The annual leave bank did not distinguish between sick leave and vacation leave, and firefighters could use accrued leave for any purpose.

The city cashed out excess hours from firefighters' leave banks every year but did not include those amounts in the regular rate of pay.

The firefighters claimed, however, that the city improperly failed to include the buyback amounts in calculating overtime pay.

ISSUE: Should the city have included the leave buyback amounts in calculating the regular rate of pay?  

DECISION: The city did not have to include the leave buyback amounts when calculating the firefighters' regular rate of pay, a federal district court ruled.

The court noted that the Fair Labor Standards Act excludes payments made to employees for periods not worked because of vacation or illness from inclusion in the calculation of their regular rate of pay. This exclusion also applies when employees forgo vacations but still receive vacation pay in addition to their regular pay for hours worked, it said.


Excess leave hours cashed out annually by employees were not considered for overtime purposes.  

The court acknowledged a split between federal circuit courts as to whether buyback compensation for unused sick leave must be included in employees' regular rate. Some circuit courts have declared that buyback programs reward consistent attendance by employees, which is a specific, work-related duty that provides value to employers, the court said.

The firefighters' case, however, was different because the city did not distinguish between sick and vacation leave, the court said. Employees could use accrued leave time for scheduled and unscheduled leave, and the buyback program did not reward the employees for consistent attendance, the court said.

The employer's classification of debited leave time as either annual leave scheduled or annual leave unscheduled was for the city's internal scheduling purposes and did not affect the employees' use of annual leave, the court said.

The court did not consider hours contained in the restricted account because employees could not deduct hours from the account and the city did not buy back any leave from the restricted accounts.

Although the firefighters claimed that most employees used annual leave for scheduled absences, the court determined that the city did not track the use of leave time and did not instruct employees in how to use their leave. Any hours remaining in the leave bank that were subject to buyback could be used for any purpose, the court ruled (Balisteri v. Menlo Park Fire Protection District, N.D. Calif., C 10-03102-SBA, 3/30/12).

POINTERS: An employee's regular rate is the base rate for calculating overtime pay required by the Fair Labor Standards Act. Under the FLSA, employers must pay employees overtime compensation at a rate of at least one and one-half times the regular rate for each hour or fraction of an hour that was worked in excess of 40 in a workweek.

The FLSA defines the regular rate as “all remuneration for employment paid to, or on behalf of, the employee.” When an employee is compensated hourly, the regular rate is the same as the hourly wage.

When hourly compensation is not the case, the regular rate can be determined by totaling workweek earnings and dividing by the number of hours worked. However, employers must know what payments can be included in the regular rate and what payments can be excluded.

The FLSA allows employers to exclude paid leave that they regularly and customarily provide, such as vacation and sick leave, from employees' regular rates when calculating overtime.

For more information, see “Determining Overtime Compensation” in the Compensation and Benefits Library.

By Keith M. Hill  

The preceding case discussion illustrates how courts resolve pay-related disputes. The names and dialogue are fictitious.