Minnesota Supreme Court Issues Decision in Vacation-Pay Case
By: ANNE M. RADOLINSKI
January 2008
On November 15, 2007, the Minnesota Supreme Court issued the long-awaited decision in the vacation-pay case, Lee v. Fresenius Medical Care, Inc. As you may remember, the Minnesota Court of Appeals determined last year in Lee v. Fresenius that the employee should have been paid for her accrued and unused vacation pay upon termination of employment, despite the employer’s vacation pay policy that made her ineligible for payment because she was terminated for misconduct. The Minnesota Supreme Court reversed that decision.
In light of the Minnesota Supreme Court decision, company policy can and will determine when an individual is entitled to payment for accrued and unused vacation or payment for other accrued paid time off upon resignation or termination.
In Lee v. Fresenius, the employer’s vacation-pay policy provided that an employee who resigned from employment would be paid for earned but unused vacation time if the employee provided proper notice. However, it stated that an employee would not be paid for such vacation time if the employee did not give proper notice or was terminated for misconduct. Lee was terminated for what the employer described as a “pattern of behavior” that resulted in “performance and patient safety issues,” and she was not paid her earned but unused vacation time.
Seeking her vacation pay, Lee filed a claim in conciliation court about two years after her termination. The conciliation court found in her favor. The employer appealed the matter to the district court, which ruled in favor of the employer. Lee appealed to the Minnesota Court of Appeals, which ruled that Lee must be paid for her earned but unused vacation time despite the policy provisions, reasoning that earned vacation constitutes wages under Minnesota law and must be paid upon termination. The Court of Appeals had specifically relied on Minn. Stat. § 181.13 (a), which provides that upon termination and within 24 hours of the employee’s demand for payment, an employee must be paid all wages.
The Minnesota Supreme Court, in rejecting the Court of Appeals’ ruling, determined that the Fresenius employee handbook constituted a contract of employment between the company and its employees. As a result, the vacation-pay policy in the handbook could and did govern when and how unused vacation-time wages were to be paid. The Supreme Court agreed with the Court of Appeals that vacation constitutes wages under Minn. Stat. § 181.13 (a) but reasoned that vacation pay is different from the wages an employee receives for work performed. “Contractual” terms, for instance, in an employee handbook, can impose conditions on vacation pay and determine when it is paid.
The Minnesota Employment Law Council (MELC) had submitted a brief in support of the employer’s position, informing the Supreme Court of the potential consequences of treating accrued vacation payment as an absolute right. The Court appeared to be persuaded by a number of the MELC’s points. MELC discussed how treating vacation as an absolute right would prevent an employer from having “use it or lose it” vacation policies. Under such policies, if an employee does not use vacation time by a specified date, the employee forfeits the vacation time. MELC had explained that such policies are important for employers because they encourage employees to take time away from work and thus return to work refreshed and reenergized. They also allow employers to have predictable expenses for budget purposes. MELC also alerted the Court that many employers, for similar reasons, place a cap on the amount of vacation time that employees may accrue. The Court noted that if payment of vacation was considered an absolute right, all of these types of policies would be in jeopardy.
The overall decision—that company policy may define vacation entitlement—is welcome news for employers. The Supreme Court, however, made reference repeatedly in the decision to the employee handbook as the “contract” between the employer and the employees. This part of the Supreme Court’s decision is curious, because it seems to run counter to the notion of an employee handbook as setting forth guidelines, not contractual obligations. Over the years, employers have taken great pains to make sure that their handbooks contain disclaimer language to the effect that the handbook does not constitute a contract between the company and its employees. Lawyers representing individuals may try to use the Supreme Court’s discussion in Lee v. Fresenius to bolster arguments that other provisions in handbooks, in addition to vacation-pay policies, create contractual obligations. It is thus even more important for employers to have their handbooks periodically reviewed by counsel, not only for updates, but also to ensure that the provisions do not inadvertently make contractual promises that were not intended and to avoid other unintended consequences. For instance, the employee in Lee v. Fresenius argued alternatively that her case should be remanded to the trial court for trial on whether she was justifiably terminated for misconduct. The Supreme Court declined to rule on the issue because Lee did not raise it in the lower trial court. The wording of the particular vacation-pay policy in the Fresenius employee handbook could invite litigation in every instance in which vacation pay is denied to determine whether, as a factual matter, the conduct rose to the level of misconduct.
Finally, it is possible that we will see legislative activity in reaction to the Supreme Court’s decision in Lee v. Fresenius. Justice Alan C. Page issued a lengthy dissent in the case that is likely to be reviewed by members of the state legislature. We will continue to keep you abreast of any developments.
If you have any questions about vacation and paid time off (PTO) policies or would like counsel to review current or proposed employee handbooks and other policies, please contact an attorney in Fredrikson & Byron’s Employment & Labor Law Group.
Takeaway
Company policy determines when an individual is entitled to payment for accrued and unused vacation or payment for other accrued paid time off at termination or resignation.