The Minnesota Supreme Court has issued its long-awaited decision on vacation and other paid time off ("PTO") policies, holding that employers can decide in a handbook or other document whether to pay earned but unused vacation to departing employees. In Lee v. Fresenius Medical Care, Inc., the Court held that the employer was legally entitled to adopt and enforce its policy of not paying vacation pay to terminating employees who resigned without providing sufficient notice or whose employment ended because of misconduct. The Court rejected the employee's argument that her vacation was the same as her final wages, which state law mandates that employers pay at the time of termination.
The Court observed that there is no legal right to a vacation benefit. Rather, vacation and all of the conditions and rules pertaining to the benefit are a matter of contract between the employer and its employees. The Court said that employers "have considerable discretion in choosing how and whether to compensate employees for vacation time." This discretion includes the right "to set conditions that employees must meet in order to exercise their earned right to vacation time with pay." Those can include, for example, that employees request time off in advance, take the time off only with permission, and satisfy any requirements for being paid upon termination of their service. By continuing to work for the employer under such rules, employees agree to accept the benefit and its terms.
While not expressly at issue in the case, the Court noted with approval other features common to many employer vacation policies. They include programs in which employers cap accruals of time off, and so-called "use or lose" policies that require time off to be taken by a certain deadline or be forfeited.
1. Consider employee relations when designing a policy. This new decision offers the ability to be flexible in vacation or "PTO" programs. But a policy rewarding exiting employees with payment of their unused vacation may have more value than the savings that could be achieved from limiting the payout.
2. While establishing the right of employers to set conditions on vacation pay, the Supreme Court also held that vacation is an earned wage under the wage payment laws. Thus, if the policy does entitle terminating employees to be paid for their earned vacation, employers must comply with their own rules or face liability for the amount due, financial penalties, and attorneys fees.
3. Whichever policy you adopt, be certain that its terms are spelled out explicitly so employees understand them, and communicate the policy by distributing it in the employee handbook or other document that employees receive. That way, you can enforce the "contract."
Please contact the Maslon Labor and Employment Practice Group if you would like additional information about this important development.
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