Vacation Policies In Light of a Recent Minnesota Court of Appeals Case

By: INGRID N. CULP

December 2006

As noted in our last Focus Newsletter, the Minnesota Court of Appeals recently ruled in Susan Lee v. Fresenius Medical Care, Inc. that earned vacation is a form of “wages” as defined by Minnesota statutes that require employers to pay employees earned but unpaid wages upon separation from employment. Until this ruling, Minnesota employers were not required to pay separating employees for their earned but unused vacation unless the employer agreed to do so by policy or practice. In the wake of the Susan Lee case, employers have had numerous questions regarding the legality of their vacation policies.  

Q:       Has the Susan Lee case been appealed?

A:        Yes. The employer in the Susan Lee case has appealed the Court of Appeals’ decision to the Minnesota Supreme Court, which agreed to hear the case. We anticipate the Supreme Court’s ruling sometime in the next 12 months or so. Fredrikson & Bryon’s Employment & Labor Law Group will publish an article in its Focus newsletter regarding the Supreme Court’s ruling shortly thereafter.

Q:       Does my company have to comply with the Susan Lee case even though it has been appealed?

A:        Yes. The Susan Lee decision represents current law. While the Minnesota Supreme Court may disagree with the holding in the Susan Lee case, we won’t know if this is the case for some time. For now, we recommend that all employers pay earned but unused vacation to all separating employees. If an employer does not wish to change its written policy before the Minnesota Supreme Court rules, it may leave the written policy as is for now, and then modify it only if required to do so by the Court.

Q:       Can an employer place conditions on payment of earned but unused vacation at separation from employment? For example, can an employer pay out earned but unused vacation to employees who resign but not employees who are terminated, or only to employees who have been employed for more than one year?

A:        No. The Susan Lee court ruled that earned but unused vacation is “wages” and that an employer cannot place conditions on payment of earned “wages” at separation from employment. Therefore, a Minnesota employer must pay a separating employee for his or her earned but unused vacation without regard to any previous conditions or forfeiture rules.

Q:       Our company provides employees Paid Time Off (PTO) instead of paid vacation. Does the ruling in Susan Lee apply to PTO as well as vacation?

A:        Yes. While the Susan Lee case involved a vacation policy, the court’s analysis applies to PTO policies as well.

Q:       Does the Susan Lee ruling apply to paid sick time?

A:        No. There is nothing in Susan Lee that suggests an employer must pay its separating employees for earned but unused sick time. To avoid disputes over this issue, we recommend that employers expressly state in their sick-time policies that earned but unused sick time is not paid out at separation from employment.

Q:       Some employers say their employees “earn” vacation; others say their employees “accrue” it. Does this make a difference under the Susan Lee case?

A:        No. For purposes of payment of vacation at separation from employment, the terms “earned” and “accrued” are synonymous. Separating employees must be paid for their vacation balance upon separation from employment regardless of whether such vacation was earned or accrued.

Q:       Does the ruling in Susan Lee mean that employers have to allow carry-over of earned but unused vacation from one vacation year to the next?

A:        Because the Susan Lee case did not address this issue, it appears that Minnesota law continues to allow employers to prohibit carry-over of earned but unused vacation. This means that an employer may require an employee to forfeit his or her earned but unused vacation at the end of the vacation year without carry-over or payout, if clearly stated in the employer’s written vacation policy.

Q:       What if my company cannot afford to, or does not wish to pay out large amounts of earned but unused vacation at separation from employment?

A:        One way an employer can control the amount of earned but unused vacation employees have is to have them accrue it over time as opposed to receiving credit for the entire year’s allotment at the beginning of the vacation year. Another way  to control vacation balances is to limit or prohibit carry-over from one vacation year to the next. Even if your company allows carry-over, you can cap the amount of vacation an employee can have earned at any one time. For example, an employer may provide that an employee may not have more than 160 hours of earned vacation at any one time; once this cap is reached, the employee will cease earning vacation until some of that time is used.

Q:       I have a question that is not addressed above. Who should I contact?

A:        Please call any of the Fredrikson & Byron employment law attorneys.