Final Paycheck Deduction For Advanced Vacation Time Held To Violate NH Law

Photo of Linda Johnson
Linda S. Johnson
Director, Litigation Department and Vice Chair of Education Law Group
April 1, 2004

Across the state, many a New Hampshire employer allows its employees to take vacation time before it is fully accrued. In such instances, the employer will usually have the employee sign an authorization in which the employee acknowledges that he or she is taking vacation prior to fully accruing it and authorizing the employer to withhold wages from the employee’s final paycheck should such vacation not be fully accrued at the time of termination. Up until recently, the New Hampshire Department of Labor took the position that this was an acceptable means of handling the situation of advancing unaccrued vacation. Employers beware – that is no longer the case.

The current position of the New Hampshire Department of Labor is that an employer may not deduct vacation advanced to an employee from the employee’s final paycheck. This was the decision reached by the Department of Labor on November 12, 2003 in the case of Tarmy v. Hydro Air, Inc. Hydro Air, Inc. argued that the advanced vacation time was treated the same as a loan. The employee handbook was clear that loans had to be paid back and when the claimant was terminated, the company wanted the money to be returned. The New Hampshire Department of Labor disagreed. It noted that while the employee handbook referred to loans, it did not explicitly place unearned vacation time in the category of a loan. In addition, this was not a case where the employee had signed an authorization acknowledging either that the advanced vacation was a loan or that the employee would pay the money back. Under the circumstances, the hearings officer held that the employer withheld the wages without the written authorization of the employee and contrary to any prevailing state or federal law. The hearings officer referred specifically to RSA 275:48(I) which reads:

No employer may withhold or divert any portion of an employee’s wages unless:

(a) The employer is required or empowered to do so by state or federal law, or

(b) The employer has a written authorization by the employee for deductions for a lawful purpose accruing to the benefit of the employee as provided in the regulations issued by the Commissioner,

(c) The deductions are pursuant to any rules or regulations for medical, surgical or hospital care or service, without financial benefit to the employee and openly, clearly, and in due course in the employer’s books.

The Department did, however, deny the employee’s claim for liquidated damages holding that “The employer acted in what they thought was money due to them, and it may be very well due to them, except it is not to be paid back by the deduction from the claimant’s wages.”

Would the decision have been different if the employer had the employee sign a form acknowledging the advance vacation and authorizing the deduction from the final paycheck? Not so, say the inspectors from the New Hampshire Department of Labor. According to them, since this method of paying back an employer for advanced wages is not authorized under New Hampshire law or under the Department’s regulations, it can’t be done. No one seems to win by this result since law abiding employers will now deny employees the benefit of taking unaccrued vacation in advance of accrual unless they do so at the risk of not being paid back or of taking the employee to small claims court. The Department has acknowledged this dilemma but has stated that the resolution is a statutory or regulatory amendment which they attempted to accomplish a couple of years ago but never got approved.