Articles

Court Ruling Establishes New Vacation Pay Rules
Charles A. Horowitz, Attorney at Law

On November 15, 2007, the Minnesota Supreme Court issued an opinion with potentially profound significance to employees and employers in the State of Minnesota. In the decision, entitled Lee v. Fresenius, the Court legitimized the use by employers of post-accrual vacation time forfeiture provisions in employment contracts. The plaintiff in the case, a dialysis patient care technician, had accrued over $3,000 in "paid time off" (i.e., vacation pay) prior to her termination. The employment contract entitled employees to a post-employment payout of earned PTO only if (1) they resigned after giving proper notice; or (2) were terminated for reasons other than good cause.

In the Lee case, the employer refused to pay the discharged employee her accrued overtime, asserting that good cause existed to terminate her employment, based upon a series of alleged acts of misconduct. For her part, the employee argued that she was terminated in retaliation for union organizing activities, and noted a prior record of superior performance reviews. In siding with the employer, the Court ruled that even though PTO qualifies as wages under Minnesota's wage payment statute, entitlement to overtime pay is strictly a matter of contract between the employer and employee, and the wage payment statute, Minn. Stat. § 181.13(a) only addresses the timing of payment of wages, not the right to wages. In dissent, Justice Alan Page argued that the "accrual" of PTO acts as a statutory trigger, prohibiting any subsequent forfeiture.

In the aftermath of this important opinion, which reversed commonly held assumptions, many employers in Minnesota will likely revise their vacation policies to enact forfeiture provisions similar to the one at issue in the Lee case. In addition, the number of vacation pay lawsuits will likely decline, based upon the Court's ruling that accrued vacation pay falls outside the definition of "wages" under the wage payment statute. Under the applicable fee-shifting statute, Minn. Stat. section 181.171, subd. 3, an employee who successfully sues to recover "wages" is entitled to an award of attorney fees. If, as employers are sure to argue post-Lee, accrued vacation is purely a matter of contract and subject to forfeiture, an employee suing an employer to recover these amounts will have to pay his or her attorney fees, regardless of outcome, which in most cases will greatly exceed the vacation pay award.

Whether Lee constitutes good or bad policy is a matter of debate. On the positive side, the decision creates certainty in budgetary planning for employers. On the negative side, Lee arguably creates a perverse incentive for employers to terminate employees "for cause" in bad faith, to trigger a forfeiture of accrued vacation pay. It should be interesting to see if the Minnesota legislature in the next session enacts legislation to overturn Lee.

Charles A. Horowitz is an Attorney at Mansfield Tanick & Cohen. He can be reached at (800) 401 6194.