At long last, the Minnesota Supreme Court ruled on a controversial decision by the court of appeals last year regarding the treatment of vacation pay and paid time off (“PTO”) under Minnesota’s wage payment statute. In Lee v. Fresenius Medical Care, Inc., (2007 WL 3378653), the Minnesota Supreme Court held that, although vacation pay and PTO constitute “wages” under Minnesota Statute section 181.13, an employer’s obligation to pay out unused vacation or PTO upon termination is “wholly contractual.” Thus, employers may lawfully enforce a policy to refuse payment of PTO to an employee terminated for misconduct.
The case involved a claim by Susan Lee against her former employer, Fresenius Medical Clinic, earned but unpaid vacation time under Minn. Stat. section 181.13.Statute section 181.13 requires employers to pay “wages or commissions” to a discharged employee within 24 hours of demand or face penalties and attorney’s fees. Lee’s employment handbook provided that she would receive payment for earned but unused vacation time if she gave proper notice, but not if her employment was terminated for misconduct. The court of appeals held that this policy, and the denial of accrued vacation pay under the policy, was invalid, as “a party cannot provide by contract what is prohibited by statute,” referring to section 181.13(a).
The Minnesota Supreme Court reversed, holding that section 181.13 does not create a substantive right to vacation pay, but is simply a timing statute. Although the statute mandates when the employer must pay earned wages, the employer’s contract or policy will govern what wages an employer must pay to a discharged employee. The court reasoned that because Minnesota law does not provide for employee vacation time or pay as of right, employers have the discretion to choose whether and under what conditions employees will earn vacation benefits. Similarly, employers can “set conditions that employees must meet in order to exercise their earned right to vacation time with pay.”
What does this mean for Minnesota employers? This decision is significant because, as vacation is a benefit and not a right guaranteed by Minnesota statute, an employer can establish the terms and conditions under which an employee is eligible for PTO or vacation upon termination of employment and that policy will not be invalidated by section 181.13.
It is also noteworthy because the court held that the employee handbook, which contained the vacation policy, was an enforceable contract. Because employers typically include disclaimers in their handbooks – so that they are not construed as a binding contact—it might now be a good idea to set forth the PTO policies in a separate document which is clearly a binding contract between the employer and the employee. That way, a policy placing conditions on the exercise of vacation pay will not be at risk as being unenforceable.
Finally, the Minnesota Supreme Court implicitly approved written policies capping the amount of vacation or PTO an employee can accrue, as well as “use-it-or-lose-it” vacation or PTO benefits. Accordingly, to prevent escalating vacation balances, an employer can prohibit or limit the carryover of unused vacation or PTO from year to year.
If you have any questions please do not hesitate to contact Susan Ellingstad at seellingstad@locklaw.com or 612-339-6900.
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