MINNESOTA SUPREME COURT APPROVES 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 collect penalties of up to 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 v. Tonka Corporation, the Minnesota Court of Appeals held that “wages” includes vacation time accrued and unpaid at the time of termination.

Last year in this newsletter, I reported that the Minnesota Court of Appeals had decided Lee v. Fresenius in August 2006. In that case, the Court had 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.

On November 15, 2007, the Minnesota Supreme Court reversed the Court of Appeals in this case. The Court held that the employee had not earned the right to payment in lieu of paid time off because she failed or could not meet the conditions in the handbook entitling her to that payment. The Court found that the handbook was an employment contract containing conditions precedent to the entitlement to receive pay in lieu of vacation at termination.

In that case, her failure was that she was terminated for misconduct, but resignation without giving two weeks’ notice would also result in no payment of accrued vacation under that handbook. The employee had not argued at trial that she had not committed misconduct, so the Supreme Court would not allow her to make that argument for the first time to the Supreme Court.

Conclusion: Employers can now expect that such provisions will be enforceable should they choose to include them in their handbooks or employment contracts. I do not generally recommend such provisions, however.

First, with regard to misconduct, if the employee chooses to contest that he has committed misconduct, there will generally not be enough vacation pay at issue for the employer to justify the time to prepare and defend the “misconduct” decision in conciliation court. Furthermore, if the employer is unsuccessful in such defense, the employer will be liable not only for the vacation pay, but also for the penalty of 15 days’ wages. On the other hand, the employee does not have much to lose in deciding whether to contest the decision.

Second, with regard to requiring notice before termination, I generally recommend that you “request” rather than “require” notice and that your handbook contain disclaimers that it is NOT a contract and, thus, not binding on the employer. I also recommend that employers specifically state that employment may be terminated with or without notice or cause by either the employer or employee at any time. Imposing a penalty on the employee but not on the employer for failing to give two weeks’ notice flies in the face of all of these disclaimers and, at a minimum, creates an appearance of heavy-handedness on the part of the employer. Furthermore, it is generally possible for the employee to avoid the penalty simply by using up his vacation just before giving his notice.

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.