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Erich v. GAF Corp.

Decided: May 10, 1988.


On certification to the Superior Court, Appellate Division.

For reversal and remandment -- Chief Justice Wilentz and Justices Clifford, Handler, Pollock, O'Hern, Garibaldi, and Stein. For affirmance -- none. The opinion of the Court was delivered by O'Hern, J.


This case concerns the appropriate standard of judicial review to be used in analyzing an employer's determination of employees' entitlement to accrued vacation pay on layoff. There are two aspects to the issue, namely, (1) whether the question should be decided under federal law because the Employee Retirement Income Security Act of 1974, 29 U.S.C.A. §§ 1001 to 1461 (ERISA) preempts this aspect of employee relations, and, (2) depending on whether federal or state law governs, what standard of review should apply.

This case presents an unusual analytical exercise in that both parties have argued before us that this matter is to be decided under federal law despite a divergence in federal precedent regarding the issue, see California Hosp. Ass'n v. Henning, 770 F.2d 856 (9th Cir.1985), cert. denied, 477 U.S. 904, 106 S. Ct. 3273, 91 L. Ed. 2d 564 (1986) (vacation pay not preempted by ERISA), and Holland v. National Steel Corp., 791 F.2d 1132 (4th Cir.1986) (vacation pay preempted), and despite a federal regulation expressly disclaiming ERISA preemption of vacation pay benefits. 29 C.F.R. § 2510.3-1(b)(3)(i) (1987).

The trial court, believing that ERISA permitted but a narrow scope of judicial review of plan administration, limited its review to a consideration of whether the employer's action in disallowing the vacation pay or changing the vacation pay policy was "arbitrary or capricious." The standard is familiar. We use it when reviewing agency action, Public Serv. Elec. and Gas Co. v. New Jersey Dep't of Envtl. Protection, 101 N.J. 95, 103 (1985), or one similar in reviewing certain private actions impacting on the public interest, Berman v. Valley Hosp., 103 N.J. 100, 106-08 (1986). Without suggesting that

we are bound by the stipulation of the parties, we find that the policies that favor non-preemption in this area of employer-employee relations support a broader standard of review under either state or federal law. Consequently, we reverse the judgments below and remand the case for further consideration in accordance with this opinion.


As noted, this case arises from a dispute over vacation pay that discharged employees of GAF claim as their due. In essence, the question is whether an employee discharged in mid-year is entitled to be paid, on an anniversary-year basis or on a calendar-year basis, for the prorated unused vacation days accrued during the year of discharge in addition to the unused vacation days from the previous year.

The controversy was caused by a shift in the employer's vacation policy from the anniversary-of-employment basis to the calendar-year basis. At stake for terminated employees is the value of earned vacation days lost by the shift. This issue may not seem momentous in its recital, but it means a lot to those who worked hard for a few days or weeks of vacation. The plaintiff employees are particularly aggrieved by what they regard as GAF's unilateral change in the terms of the employment for the purpose of cutting costs in anticipation of mass layoffs. Because this case comes before us on review of the grant of GAF's motion for summary judgment, we are bound to accept plaintiffs' version of the events as true and to accept all the favorable inferences that might be drawn from those facts. E.g., Pierce v. Ortho Pharmaceutical Corp., 84 N.J. 58, 61 (1980).

The factual background for these issues may be drawn from the statement of Edith H. Gazda, GAF's former Director of Compensation. She explained that under GAF's pre-1980 general vacation policy, no vacation was earned at all unless an employee had worked for a fixed period of time, either six

months or a year. Only then would an employee be allowed to take vacation. "Thus, there was a continuing cycle of working one year for vacation and taking it the next." She also noted that the company's 1979 Policy Manual provided that employees terminating service with GAF "would be entitled to one-twelfth (1/12) of their unused vacation pay for each month they worked in a calendar year in which they terminated." (Emphasis added). However, the 1979 policy had a flaw that enabled employees to beat the system by taking their full vacation entitlement early in a work year, prior to an anniversary date, only to return to work and announce they were quitting. By contrast, responsible employees who gave notice of their intent to resign received only a prorated portion of their vacation pay based on the number of months they had worked that year. Yet another problem was posed ...

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