Lee v. Fresenius Medical Care

On November 15 2007, the Minnesota Supreme Court decided Lee v. Fresenius Medical Care, Inc. (Case No. A05-1887, 2007 WL 3378653), resolving in favor of employers the question whether an employer is required to pay out all accrued vacation and paid-time-off (PTO) to terminating employees in all cases. The Court held that this issue is purely a matter of contract between the employer and employee, such that an employer need not pay out unused vacation and PTO in accordance with its internal written policies.

In Lee, the court construed a company’s PTO pay-out policy in light of Minnesota Statute Section 118.13(a), which makes wages “actually earned and unpaid at the time of discharge immediately due and payable on demand.” The employer’s policy, set forth the company’s handbook, provided that employees would be paid for earned-but-unused PTO at resignation unless they 1) failed to give proper notice, or 2) were terminated for misconduct. Based on this policy, the company declined to pay out the plaintiff’s earned-but-unused PTO following her termination for misconduct. The employee claimed that she was entitled to this payout based on Section 118.13(a).

The Minnesota Supreme Court held that while vacation and PTO are “wages” under Section 118.13(a), the statute does not itself grant a right to vacation, PTO, or PTO payout. Rather, the employee’s rights to these “wages” are governed wholly by contract. Essentially, the court clarified that Section 181.13(a) is a timing statute. The contract determines what “wages” an employer must pay to a discharged employee, whereas the statute mandates when an employer must pay those wages. Employers are therefore permitted to impose conditions upon employees’ rights to use earned vacation or receive payout for unused vacation. In this case, “Lee earned her right to use paid time off while she was employed, but she is not entitled to payment in lieu of paid time off because she could not meet the employment contract condition of giving proper notice after she was terminated for misconduct. Fresenius did not violate the terms of its employment contract and therefore is not liable in this case.”

Dorsey’s Involvement in Lee

The Minnesota Employment Law Council (MELC), a group of the largest employers in Minnesota, participated as amicus in Lee. The group advocates for employers in a number of ways, including lobbying in the Minnesota legislature and participating as amicus in important cases before the Minnesota Supreme Court. MELC participated as amicus in Lee and the Court’s opinion made extensive reference to arguments advanced in the brief prepared for MELC by Dorsey about the unintended consequences of deciding for the employee.

“As amicus curiae Minnesota Employment Law Council (MELC) argues, if we interpreted section 181.13(a) to stand for the proposition that an employee had actually earned an absolute right to compensation for paid time off as soon as she had accrued those hours in a given pay period, we would create uncertainty and potentially serious collateral consequences for many employers’ vacation-benefit policies.”

The Court then discussed MELC’s argument that deciding for Lee would jeopardize the validity of “use-it-or-lose-it” policies and employer caps on how much vacation time employees may accrue. The Court stated that “if we reached a different conclusion in this case, and held that employees have actually earned an absolute right to vacation pay as they accrue vacation hours for working each pay period, the legality of both the use-it-or-lose-it policy and the cap-on-vacation-time-accrual policy would be called into question. We do not believe the legislature intended the consequences of such an interpretation when it enacted section 181.13(a), particularly when employers are under no obligation to offer any vacation time or paid time off to employees.”

Recommendations for Employers

It is particularly important to note that the Lee decision was based on the assumption that the employee handbook, which contained the PTO policy, was an enforceable contract. Dorsey has long recommended that employers include a specific disclaimer in employee handbooks stating that the handbook is NOT a contract. With the opinion in Lee, however, it becomes important that PTO/vacation pay-out policies are considered enforceable contracts.

We recommend that employers continue to use a disclaimer in their employee handbooks explicitly stating that the handbook is not a contract. However, in light of Lee, it is important to clarify that a PTO policy is a contract. Otherwise, a court may find that the handbook also disclaims provisions that an employee is not entitled to PTO-payout “wages” even if terminated for misconduct. Therefore, while employers may still include a description of vacation and PTO payout policies in employee handbooks, those policies should also be set forth in a separate document made available to employees that can clearly be viewed as a contract. Employers should be similarly careful with other policies such as commission plans and benefits.

Another Significant Case for Employers

In another recent victory for MELC, the Minnesota Supreme Court granted MELC's petition to participate as amicus in the appeal of Frieler v. Carlson Marketing. The case addresses whether and how federal precedent growing out of the Faragher and Ellerth US Supreme Court decisions should apply to sexual harassment claims arising under the Minnesota Human Rights Act. This has to do with the all-important affirmative defenses which attach to well written and communicated protective employer policies and an employee's failure to invoke them.