On November 15, 2007, the Minnesota Supreme Court ruled employees do not have a statutory right to payment of earned vacation pay upon termination. Lee v. Fresenius Medical Care, Inc., - - - N.W.2d - - - 2007 WL 3378653 (Minn.2007). Simply stated, this is a favorable decision for Minnesota employers.

The legal issue in this case was whether the employer was obligated to pay an employee earned, but unused vacation time (PTO) upon the employee’s termination. The Minnesota Supreme Court concluded that an employer has the right, through an employee handbook or policy, to set rules by which an employee is eligible for vacation pay upon termination.

By way of background, the employer in this case maintained a policy which stated:

An employee who gives proper notice. . . is eligible to be paid for earned but unused PTO. . . .[I]f you do not give acceptable notice, you may not be paid for earned but unused PTO. . . In addition, if your employment is terminated for misconduct, you will not be eligible for pay in lieu of notice or payment of earned but unused PTO unless required by state law.

Thus, through its policies, the employer imposed two conditions before an employee would be eligible for payment of PTO upon termination: (1) proper notice; and (2) separation for a reason other than misconduct.

The employee claimed Minnesota Statute §181.13(a) obligated the employer to pay earned but unused vacation pay notwithstanding the employer’s policy to the contrary. In relevant part, Section 181.13(a) provides: “When any employer employing labor within the state discharges an employee, the wages or commissions actually earned and unpaid at the time of the discharge are immediately due and payable upon demand of the employee.” The employee argued this language created an affirmative duty on the part of the employer to pay earned but unused PTO time on the grounds that such time should be considered earned wages under the statute.

Although the Minnesota Supreme Court agreed with the employee that vacation benefits are considered wages for purposes of this particular Minnesota Statute, the Court did not agree that the employer was obligated to pay the employee unused PTO upon termination as a result of the employer’s policies. The Supreme Court concluded that because Minnesota Statutes do not provide for employee vacation pay as a matter or right, employers may lawfully determine the rules by which employees are eligible for such benefits, and the payout of such benefits.

Here, the employer set forth conditions that the employee was required to meet before she was eligible for PTO payment upon termination. The employee failed to meet those conditions and, as a result, she was not paid for her unused PTO. Thus, because this employer decided not to offer payment of PTO to employees who did not provide proper notice and employees who were terminated for misconduct, these contractual terms (i.e. the employer’s requirements) were valid.

In sum, the Court made clear that employees do not have a statutory right to receive payment of earned, but unused vacation pay. Instead, employees’ eligibility for the payment of vacation benefits (or PTO) is subject to the requirements that employers may set via policies or handbook provisions. Accordingly, Minnesota employers should take the opportunity to reevaluate their policies in this regard to insure they pass muster under this new decision.

For additional information, please contact Brian Benkstein (612-373-8538), Jim Dawson (612-373-8422), Sara McGrane (612-373-8511), Dennis Merley (612-373-8434), or Paul Zech (612-373-8436).