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In a decision filed on November 15, 2007, the Minnesota Supreme Court held in Lee v. Fresenius Medicare Care, Inc., that “an employee has not earned the right to payment in lieu of paid time off when she has failed to or cannot meet the conditions in the employment contract entitling her to that payment.” This decision reversed the Minnesota Court of Appeals' determination that an employer was required to compensate a discharged employee for earned but unused vacation time despite the fact that the employer's vacation policy (as contained in the employee handbook) clearly stated that the employee was not entitled to vacation pay upon termination in certain circumstances, namely an employee that was terminated for misconduct.

In Lee, the Supreme Court rejected the employee's argument that, notwithstanding the employment contract, the employee was entitled to payment in lieu of paid time off because it is required by Minn. Stat. § 181.13. Minn. Stat § 181.13 requires employers to pay earned but unpaid wages or commissions to discharged employees within 24 hours of an employee demand. The court concluded that, although paid time off or vacation pay constitutes “wages” for the purposes of Minn. Stat. 181.13, the statute does not create a substantive right to vacation pay. Rather, the court determined that Minn. Stat. § 181.13 is a “timing statute,” mandating only when an employer must pay a discharged employee, not what an employer must pay.

It is clear that Minnesota law does not mandate the terms on which paid time off or vacation pay must be offered to employees, or that it be offered at all – it is entirely a matter of contract between the employer and employee. The Lee case now makes clear that employers are also free to set conditions through contract, such as a properly crafted PTO or vacation policy, whereby an employee may not be paid earned but unused vacation pay upon termination of employment, if for example, the employee is terminated for misconduct or fails to give proper notice. The court noted that any other conclusion would call into question the legality of both the use-it-or-lose-it policies and cap-on-vacation-time-accrual policies, which many employers and employees alike find valuable.

If you have a question regarding your current vacation or paid time off policy or how to compensate discharged employees in light of the court's decision in Lee, you may contact Winthrop & Weinstine, P.A., for assistance. Winthrop & Weinstine routinely drafts and reviews handbook policies and employment contracts to ensure compliance with employment-related laws. Our cochairs, Laura Pfeiffer and Mark Pihart, of the Employment Law practice group are available to assist with your inquiries, as well as the attorneys listed below.