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New Jersey Court Holds that an Employee Terminated for Disciplinary Reasons not entitled to Payout of PTO

On February 22, 2023, the Superior Court of New Jersey Appellate Division ruled that a hospital employee discharged for disciplinary reasons was not entitled to payment of accrued paid time off (PTO) because the hospital had an express policy that PTO would not be paid out in such situations.

In HMH Hospitals Corp. v. Warren, the appellate court found that the employee was not entitled to payment for any PTO accrued prior to termination because accrued PTO does not constitute wages under New Jersey state law and did not have to be paid out unless as provided by an employer’s PTO policy. In this case, the employer’s PTO policy provided that an employee was not entitled to be paid for unused PTO upon termination unless the employee provided at least three weeks prior notice or when “employment is terminated in connection with a disciplinary action.”1 It is important to note that this policy was only in place a few months prior to the termination.

Ms. Warren, who was a certified nurse’s assistant, sought payment after her termination for admitted misconduct for PTO hours she accrued for the three years prior to her termination. After the request was denied, Warren filed a claim with the Wage Collection Section, Division of Wage and Hour Compliance, of the New Jersey Department of Labor and Workforce Development, which assigned the matter to a wage collection referee, who conducted a hearing.

At the conclusion of the hearing, the referee found that Warren was entitled to PTO at Warren’s rates of pay at the time the PTO was accrued, however, only until the date the new PTO policy prohibiting the payment of PTO for disciplinary terminations took effect. The hospital timely appealed the referee’s determination. The lower court ruled that the company policy denying payment for accrued PTO hours was void because it found that accrued PTO constituted wages under the New Jersey Wage Payment Law and that there was therefore an obligation to pay out PTO hours upon the employee’s discharge.

However, the appellate division overruled that decision. The appellate court held that the hospital’s “PTO policy set the terms for Warren’s entitlement to pay for accrued PTO hours, and, under the policy’s express terms, she was not entitled to compensation….” Specifically, the appellate court stated, “the accrued hours constituted a benefit entitling Warren to payment at a point in the future but not as ‘direct monetary compensation for labor or services rendered” and that the hospital was “not required to offer, pay, or provide PTO in the first instance.”

What Employers Should Do

The decision by the New Jersey appellate court highlights the importance of using precise language in a PTO policy, especially when detailing whether employees are or are not entitled to payment for accrued time. The court placed emphasis on the wording of the hospital’s PTO policy indicating that the language concerning disciplinary discharge “set the terms” for when PTO would not be paid and thus. The court further noted that since accrued PTO does not constitute wages in New Jersey, employers are “to contract regarding a term of employment that does not violate the law.”