MINNESOTA SUPREME COURT FORBIDS FORFEITURE OF VACATION PAY AT TERMINATION
By Sharon G. Hobbs

Minnesota law requires employers to pay “wages and commissions actually earned and unpaid” at the time of termination of employment. Employees may collectpenalties of up to fifteen (15) days wages for an employer’s failure to pay such wages upon the employee’s demand.

The statute does not define “wages”. In 1994, in Brown vs. Tonka Corporation, the Minnesota Court of Appeals held that “wages” includes vacation time accrued and unpaid at the time of termination.

Some companies provide in their employee handbooks that if an employee does not give two (2) weeks notice (or does not do some other required action), the employee will not be paid accrued vacation at termination. When reviewing these handbooks, I have generally told clients that I recommend against such provisions, although I could not say that it was absolutely prohibited by law. Although vacation is generally considered wages, vacation pay is a matter of contract between the employer and employee. For example, an employer may provide that vacation unused during a calendar year is forfeited at the end of the year. It could be argued that the giving of two weeks notice is a contractual condition to entitlement to receive accrued vacation at termination. However, this has been an open question under Minnesota law. If an employee were to sue the employer for the unpaid vacation at termination and win, the employer could owe not only the unpaid vacation, but also the penalty of up to 15 days wages.

The Minnesota Court of Appeals decided Lee vs. Fresenius on August 8, 2006. The Court held that a handbook which provided that employees terminated for misconduct would not receive accrued and unpaid vacation was not enforceable as it was contrary to the statute requiring payment of wages at termination.

CONCLUSION:
In light of this case, and unless and until the Minnesota Supreme Court reaches a different conclusion, I recommend that all such provisions be removed from handbooks as the employer will now surely lose if the employee contests the withholding of any vacation pay. Thus, even if I have previously reviewed your handbook and you have decided to retain such a provision, I recommend that you remove it at this time.

Sharon Hobbs practices in the areas of business law, employment law and estate planning.

This article is a general discussion of legal issues and is not intended to be legal advice. We would be pleased to review the specific facts and law regarding any given legal matter.