Supreme Court of Minnesota Rules That Terminated Employee was not Obligated to Unused Vacation Pay

Employers across the country have different policies when it comes to paid time off/vacation (PTO), as well as states having specific laws.  In Minnesota (which is an at-will employment state), an employee was terminated by their employer for what was claimed to be “significant performance and misconduct concerns.”  In the employee handbook, which the employee reviewed and signed, it includes a policy stating that employees terminated for misconduct were ineligible for unused PTO. 

Two years after termination, the former employee brought action against the former employer to a conciliation court seeking the money for the equivalent of accrued vacation hours.  The court ruled that the vacation pay is wholly contractual due to the policy in the handbook which was signed, which satisfies Minnesota’s requirements to constitute a binding contract.  This ruling was appealed and this time the Minnesota Court of Appeals sided with the former employee, citing the Minnesota Statute section 181.13(a), which states, “wages or commissions actually earned and unpaid at the time of the discharge must be paid immediately upon demand, no later than 24 hours.”

The Supreme Court of Minnesota heard this case and concluded that since PTO and vacation time is a benefit and not a guaranteed right required in the state of Minnesota, the employer’s obligation to pay out unused PTO upon termination is governed by its policies in contracts.  Since the policy defined in the handbook states that employees terminated by misconduct are ineligible to receive unused PTO wages, the employer lawfully withheld pay from the former employee. 

What this means for Minnesota Employers

Based on the decision that was made by the Supreme Court, MN employers have the right to impose conditions on payments like PTO or vacation upon their employment being terminated, when conditions are implemented into clear policy.  Here are some steps employers can take to review vacation and time-off policies to avoid legal issues:

·         Ensure vacation and time-off policies are well written and defined in the employee handbook, which should be properly acknowledged to create a binding contract.

·         Directly set forth what, if anything is owed at the time of termination and under what circumstances.  Use caution with a disclaimer language to preserve Minnesota’s “employment-at-will” status, but make the rules explicit.

·         Employer’s may lawfully create policy that does not pay out unused PTO, however it should express the employer’s intent is that PTO is a benefit that is not a source of additional “wages” if the person were to not use the time or be terminated.

·         Different states have different laws, so policy language must be crafted to represent each state the employer operates in.

·         Employers should consider accruing PTO based off of amount of time worked, instead of a set number (ex. 10 days per year), which will help the employer limit the amount of unused PTO at the time of termination.

·         To help control vacation time, employers can create policy which does not allow unused time to carry over from one year to the next.

Minnesota Labor Standards-Termination