Legal Alert: Minnesota Legal Update - Employers May Contractually Decide If A Terminated Employee Is Eligible To Receive Vacation Pay

Date   Nov 19, 2007
Last year, the Minnesota Court of Appeals issued a controversial decision in Lee v. Fresenius Medical Care, Inc. In the Lee case, the employer had a written policy stating that an employee would receive any earned and unused Personal Time Off (“PTO”) benefits provided: (1) the employee was not terminated for misconduct; or (2) the employee provided the company with sufficient notice regarding the employee’s voluntary resignation. The employer elected not to pay Ms. Lee her earned, but unused PTO benefits because she was terminated for misconduct. Ms. Lee challenged this policy, arguing that such earned, but unused PTO benefits constituted “wages” under Minn.Stat. § 181.13(a), and therefore must be paid at the time of her termination. The Minnesota Court of Appeals agreed.

Last Thursday, however, the Minnesota Supreme Court reversed the Court of Appeals’ earlier decision. The Minnesota Supreme Court specifically held that, although vacation and PTO benefits constitute wages, an employer may legally adopt and enforce a written policy to not pay earned, but unused vacation or PTO benefits to a departing employee who was either terminated for misconduct or failed to provide the requisite notice for his or her resignation. The Court stated that Minn.Stat. § 181.13(a) was a “timing” statute, which mandated when an employer must pay final wages to a departing employee, not what should be paid. And, according to the Minnesota Supreme Court, when an employer grants employees the benefits of vacation or PTO benefits, the employer has considerable discretion in choosing how and whether to compensate employees for those benefits. As a result, employers have the right to set conditions that employees must meet in order to receive vacation or PTO benefits and until such conditions are met, the vacation or PTO benefits are not fully “earned.”

Additionally, although not at issue in the Lee case, the Minnesota Supreme Court commented with approval employers’ written policies relating to capping the amount of accrued vacation or PTO benefits and “use-it-or-lose-it” vacation or PTO benefits.


1. Review your current vacation or PTO benefits policy. The written policy must clearly communicate when an employee may forfeit his/her vacation pay or PTO benefits. And, if the policy entitles terminating employees to be paid for their earned, unused vacation or PTO benefits, the employer must comply with that policy or otherwise potentially face liability under Minn.Stat. § 181.13(a), including the payment of attorney’s fees.
2. Make sure employees sign the vacation or PTO benefits policy. Because the Minnesota Supreme Court stated that such a policy constitutes a “contract” between the employer and employee, the written acknowledgement of reviewing and understanding the policy by the employee is critical.

If you have any questions regarding this case or accrued vacation and PTO benefits, please contact the Ford & Harrison attorney with whom you typically work or the author of this Alert, Tina Syring-Petrocchi at 612-486-1629 or