The Minnesota Supreme Court issued an important decision this week, clarifying employers' obligations to pay accrued paid time off to employees upon termination of employment, and reaffirming that an employee's right to vacation pay or paid time off is not absolute but rather contractual.

In Lee v. Fresenius Medical Care, Inc. (reported in an August 2006 Alert), the Minnesota Court of Appeals held that accrued vacation time that had been actually earned and unused at the time an employee was discharged must be paid in the same manner as other wages and commissions. The Court of Appeals concluded that the employer's handbook provision disallowing vacation payment for an employee terminated for misconduct was legally ineffective under Minn. Stat. § 181.13(a), which provides that employers must pay discharged employees their earned and unpaid wages immediately upon demand or within a 24-hour period of the employee's demand.

The Minnesota Supreme Court disagreed. In reinstating summary judgment for the employer on the claim for unpaid wages, it stated that paid time off and vacation pay do constitute wages for purposes of Minn. Stat. § 181.13(a), but that the statute merely mandates when an employer must pay a discharged employee. The statute does not, however, create an absolute right to vacation pay accrued during employment. The Court reaffirmed its rule that an employer's liability for vacation pay is "wholly contractual." In other words, any right to paid time off during employment, or right to be paid in lieu of taking paid time off after employment has ended, is a matter of agreement between the employer and its employees. Because Minnesota law does not require employers to provide paid vacation, employers may place conditions on an employee's right to receive payment in lieu of paid time off.

In the case at hand, the Court concluded that the handbook constituted an enforceable employment contract between Ms. Lee and Fresenius, and that requiring an employee to resign with proper notice in order to receive payment of paid time off while denying payment to employees terminated for misconduct was permissible and not in violation of Section 181.13(a). Therefore, it was legal for Fresenius to deny payment of Ms. Lee's accrued and unused paid time off upon her termination for misconduct.

The decision underscores the importance of including in your employee handbook a clear statement of whether an employee will be paid for accrued but unused vacation time when his or her employment terminates, and whether there are conditions on that payment (such as no payment where termination is for misconduct). Employers should remember that accrued vacation or paid time off that is due under the terms of a policy or employment agreement must be paid within 24 hours when an employee is discharged or at the next regularly scheduled pay date in the case of a resignation.

To read the decision: