A liability for amounts to be paid as a result of employees' rights to compensated absences shall be accrued, considering anticipated forfeitures, in the year in which earned. For example, if new employees receive vested rights to two-weeks' paid vacation at the beginning of their second year of employment with no pro rata payment in the event of termination during the first year, the two-weeks' vacation shall be considered to be earned by work performed in the first year and an accrual for vacation pay shall be required for new employees during their first year of service, allowing for estimated forfeitures due to turnover. Furthermore, the definition of a liability does not limit an employer's liability for compensated absences solely to rights to compensation for those absences that eventually vest. The definition also encompasses a constructive obligation for reasonably estimable compensation for past services that, based on the employer's past practices, probably shall be paid and can be reasonably estimated.
Individual facts and circumstances must be considered in determining when nonvesting rights to compensated absences are earned by services rendered. The requirement to accrue a liability for nonvesting rights to compensated absences depends on whether the unused rights expire at the end of the year in which earned or accumulate and are carried forward to succeeding years, thereby increasing the benefits that would otherwise be available in those later years. If the rights expire, a liability for future absences shall not be accrued at year-end because the benefits to be paid in subsequent years would not be attributable to employee services rendered in prior years. (Jury duty and military leave benefits generally do not accumulate if unused and, unless they accumulate, a liability for those benefits shall not be accrued at year-end.) On the other hand, if unused rights do accumulate and increase the benefits otherwise available in subsequent years, a liability shall be accrued at year-end to the extent that it is probable that employees will be paid in subsequent years for the increased benefits attributable to the accumulated rights and the amount can be reasonably estimated.
To the extent the terms of a contract attribute all or a portion of the expected future benefits to an individual year of the employee's service, the cost of those benefits shall be recognized in that year. To the extent the terms of the contract attribute all or a portion of the expected future benefits to a period of service greater than one year, the cost of those benefits shall be accrued over that period of the employee's service in a systematic and rational manner.
In connection with the signing of new union contracts, union employees may agree to accept a lump-sum cash payment or payments in lieu of all or a portion of an increase in their base wage rate. Entities believe that in certain circumstances those lump-sum payments reduce or eliminate increases in base wage rates during the contract period that would otherwise be required. The specific terms of lump-sum payments vary, but ordinarily there is no requirement that the employee refund to the entity any portion of the payment if the employee terminates employment prior to the end of the contract period. Unlike an employment contract with an individual, the union contract applies to the work force, and there is a presumption that an employee who terminates generally will be replaced by another union member at the same base wage rate without an additional lump-sum payment.
All or a portion of a lump-sum payment may be deferred and appropriately amortized only when it is clear that the payment will benefit a future period in the form of a lower base wage rate than otherwise would have existed. The period of amortization shall not extend beyond the contract period. The terms and conditions of those payments may vary and the facts and circumstances surrounding the contract and the negotiations must be reviewed to determine how to account for the payment.
This guidance relates solely to union contracts and not to individual employment contracts or any other situation involving compensation payments to individual employees.