EMPLOYMENT LAW ALERT: Minnesota Supreme Court Enforces Vacation Policy

November 2007

EMPLOYMENT LAW ALERT:  Minnesota Supreme Court Enforces Vacation Policy

On November 15, 2007, the Minnesota Supreme Court ruled that employers can set and enforce their own policies regarding vacation and paid time off accrual, usage, and forfeiture. The decision reversed a controversial decision of the Minnesota Court of Appeals on August 8, 2006 in the case of Lee v. Fresenius Medical Care, Inc.

In Lee v. Fresenius Medical Care, Inc., the employer had a policy that provided for payment upon termination for unused accrued vacation time unless employment was terminated for misconduct or the employee resigned without proper notice. Citing misconduct as the reason for the termination, the employer refused to pay the employee for unused vacation. The Minnesota Court of Appeals found that the employer's policy was inconsistent with a state law that requires employers to pay all wages earned prior to termination within 24 hours of demand following an involuntary termination of employment. The Supreme Court agreed with the lower court that vacation and paid time off is a form of wages, but it ruled that the contract between employer and employee defined whether vacation was "earned." In addition to setting the terms for payment upon termination of employment, the Court acknowledged employers' rights to establish rules concerning the roll-over of vacation or paid time off from year to year, payment in lieu of vacation of paid time off during employment, accrual rates and caps on accrual, and how and when vacation or paid time off can be used.

Vacation or paid time off is often an important part of the competitive compensation package offered by an employer. In addition to making employment with the company more attractive, vacation/paid time off policies also provide time for employees to relax or attend to personal business so they can focus their energies more effectively at other times. Employers need to consider these factors when designing or modifying vacation and paid time off policies in the wake of the Minnesota Supreme Court's decision.

As is often the case with court decisions, the Supreme Court's ruling answered one important question while raising another. The Court declared that the employer's employee handbook, which included the vacation policy, was a contract between the employee which established the terms for payment of vacation time upon termination of employment. Sophisticated employers, however, generally include a disclaimer in their handbooks stating that the handbook does not constitute a contract. As the Court did not discuss any disclaimer in the employer's handbook, it is unclear how the court will apply the contract theory where there is a disclaimer. While it is unlikely that the Court intended to prevent enforcement of a policy established in a handbook with a disclaimer, employers may want to issue vacation and paid time off policies as stand alone policies (which could be repeated in the handbook). In that way, employers can take the position that the vacation/paid time off policy is contractual without converting all policies into binding contracts.

If you would like assistance in creating, modifying, or implementing a vacation or paid time off policy, or any other policy or employee handbook, contact your attorney at Moss & Barnett.

(November 2007)