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Trepanier MacGillis Battina P.A. 8000 Flour Exchange Building 310 Fourth Avenue South Minneapolis, MN 55415 612.455.0500

Minnesota Supreme Court Allows Employers to Limit Payment of Accrued PTO to Discharged Employees

In November 2007, the Minnesota Supreme Court issued a highly anticipated ruling which put widespread fears to rest that employers would no longer be permitted to shape the nature and extent of employee vacation benefits. The Court held in Lee v. Fresenius Medical Care, Inc., 741 N.W.2d 117 (Minn. 2007), that vacation benefits are wholly contractual and concluded that employers have the right to attach conditions to the right to accrue and receive payment for paid time off (“PTO”) within its employee handbook or through other company policies. This decision has significant implications for employers who offer PTO benefits. Accordingly, it is imperative that employers who offer PTO benefits review and revise current policies to ensure maximum benefit under the Lee decision.

The Lee Case
Lee was employed as a dialysis patient care technician for a hospital dialysis unit, Fresenius Medical Care, Inc. (“Fresenius”), in Duluth, Minnesota. Fresenius issued Lee a copy of the company’s employee handbook and Lee signed an acknowledgment form stating she had received a copy of the handbook. Lee worked thirty hours a week and, according to the handbook, Lee earned 7.69 hours of PTO each two-week pay period. The handbook further stated that Lee would not be entitled to payment of any earned but unused PTO if she was terminated for misconduct. Eventually, Fresenius terminated Lee for repeated instances of “performance and safety issues” which it deemed to be misconduct and refused to pay Lee any accrued but unused PTO under the terms of the handbook.

The Legal Dispute
The dispute in Lee focused on Minn. Stat. § 181.13(a), which requires employers to pay discharged employees for “wages or commissions actually earned and unpaid at the time of the discharge” within twenty-four hours of the employee’s demand. An employer who fails to pay in this time period is subject to statutory penalties in an amount up to 15 days’ wages. Lee argued she had “earned” the PTO she had accrued but had not used at the time of her discharge within the meaning of section 181.13(a) and was therefore entitled to a payout, regardless of the terms of Fresenius’ handbook. The Minnesota district court concluded that an employer must compensate an employee for vacation pay if the employee meets the employer’s eligibility requirements, and that eligibility requirements for such pay are determined by the employment contract. The Minnesota Court of Appeals reversed the district court decision, and concluded that section 181.13(a) requires an employer to compensate an employee for accrued but unused vacation time, and therefore a provision in an employment contract limiting eligibility for such compensation is “legally ineffective.” The Court of Appeals’ decision meant that employers were required to pay employees for all accrued but unused PTO upon termination of employment even if the employer’s policy limited or prohibited the payment of accrued PTO upon termination. As a result of this potentially disastrous outcome, the Minnesota Supreme Court’s review of Lee was highly anticipated by employers across the state.

Minnesota Supreme Court Holds Payment of PTO is Contractual
Until the decision in Lee, it was unsettled whether the term “wages” in section 181.13(a) included accrued but unused PTO or vacation leave. The Minnesota Supreme Court resolved this issue by concluding that “paid time off or vacation pay constitutes wages for purposes of section 181.13(a).” While it concluded that PTO constituted wages, the Court further held that “section 181.13(a) is a timing statute, mandating not what an employer must pay a discharged employer, but when an employer must pay a discharged employee.” This means that employers have the right to attach conditions to the right to accrue and receive payment for PTO hours upon termination of employment. The Minnesota Supreme Court found that Lee was not entitled to payment of any accrued but unpaid PTO. While an employee’s paid time off constitutes wages under Minn. Stat. § 181.13(a), the employer’s decision whether or not to entitle employees to PTO benefits, and the manner in which such benefits are offered, is governed by contract, not by section 181.13(a). Thus, an employer may lawfully refuse to pay accrued but unused PTO benefits based upon a provision in its handbook that disqualifies employees from receiving such payment upon termination for misconduct. The Court noted that if it interpreted section 181.13(a) to mean that employees earn an absolute right in any PTO as they accrue it, “the legality of both the use-it-or-lose-it policy and cap-on-vacation-time-accrual policy would be called into question.” The Court discussed the importance of the use-it-or-lose-it and cap-on-vacation-time-accrual policies to employers as they help force employees to use vacation time on a regular basis and help employers to better budget the cost of paying out these benefits.

Consequences of the Lee Decision
The Court’s ruling in Lee has several important consequences for Minnesota employers. First, if an employer contracts to provide paid PTO or vacation benefits, these benefits will be considered wages under the law and the employer will be subject to penalties if it does not pay them according to the contract. Second, employers can limit the payout of earned but unused PTO upon termination based on terms set out in an employee handbook or other company policy. Third, the Court signaled that it would approve of use-it-or-lose-it and cap-on-vacation-time-accrual policies. In light of these facts, employers should take time to re-examine current PTO policies.

If you have any questions about the Lee decision, or your company’s PTO policies, please contact one of the employment law attorneys of Trepanier MacGillis Battina P.A.
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Trepanier MacGillis Battina P.A. is a Minnesota employment law firm located in Minneapolis, Minnesota. Their employment law attorneys can be reached at 612.455.0500.