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After more than a year of confusion, Minnesota employers breathed a sigh of relief when the state’s supreme court issued Lee v. Fresenius Medical Care, Inc.1 Interpreting Minnesota’s wage payment statute, the court held that a terminated employee’s “wages” include accrued vacation or paid time-off benefits.2 Nonetheless, the court concluded that the terms of the employer’s vacation policy determined whether such benefits—if any—are accrued, used, or paid. Additionally, it held that there is no substantive right to payment for accrued vacation under the statute. The decision eliminated significant concern caused by a 2006 Minnesota Court of Appeals decision, while also clarifying the extent to which an employer has discretion to set the terms of vacation policies.

Despite the Lee court’s clarity regarding vacation benefits, the court’s brief, but significant, discussion regarding the contractual nature of employment handbook policies was still jarring for employment attorneys. Without any lengthy analysis, the court held that the employer’s vacation policy was an enforceable unilateral employment contract—a noteworthy conclusion for such a common policy. Whether this holding represents a modification of employment relationships in Minnesota, or simply an application of a fundamental principle still remains to be seen.

Facts

Lee’s facts were relatively straightforward, as evidenced by the plaintiff’s original filing in conciliation court. Susan Lee, a dialysis technician for Fresenius Medical Care, Inc, was terminated for both performance and safety issues. After termination, she brought a claim alleging Fresenius owed her more than $3,000 for 181 hours of accrued, but unused, vacation time. Her claim was based on Minnesota Statute section 181.13 which states, in relevant part, that “[w]hen any employer... discharges an employee, the wages or commissions actually earned and unpaid at the time of the discharge are immediately due and payable upon demand of the employee.”3

The company’s employee handbook included a paid time-off policy providing, among other terms, that “earned but unused” vacation would be paid upon termination if an employee provides “proper notice.” The policy also stated, however, that employees would not be paid for such vacation if either he or she did not provide proper notice or if his or her “employment [wa]s terminated for misconduct... unless required by state law.”4

The conciliation court found that Fresenius was liable for Lee’s accrued, but unused, vacation time, causing Fresenius to appeal to a Minnesota district court. The district court granted the company’s motion for summary judgment, finding that the employer’s policy actually controlled; thus, Lee was ineligible for payment of her accrued vacation.5 Lee appealed the district court’s decision to the Minnesota Court of Appeals.

The Court of Appeals Decision

The short court of appeals opinion—just five pages in the North Western Reporter—caused significant concern and confusion among employers and their counsel.6 The appellate court held that under section 181.13, employers must pay terminated employees for accrued, but unused, vacation, regardless of the terms of their vacation policy. The court first determined that accrued vacation constitutes “wages” that must be paid under the statute. The court grounded this conclusion on a 1994 court of appeals decision requiring an employer to pay a discharged employee for accrued vacation when the employer’s policy called for such payment.7

The court of appeals then noted that “an employer’s liability for an employee’s vacation pay is wholly contractual,” but held that employers nonetheless “‘cannot provide by contract what is prohibited by statute.”8 The court concluded that, since vacation was wages for the purposes of section 181.13 and the statute contained no misconduct exception, employers could not, by contract, refuse to pay employees for accrued, but unused, vacation upon termination.9 Employers were obviously concerned with the holding because it not only mandated payment of accrued, but unused, vacation time upon termination, but also called into question the validity of common practices such as “use or lose” and maximum vacation accrual levels. 

The Supreme Court’s Decision

In considering Fresenius’s request for review, the supreme court focused on two primary issues: (1) whether an employment agreement governs eligibility for vacation; and (2) whether an enforceable contract existed between Fresenius and Lee. Addressing these issues in the affirmative, the court first found that Minnesota statutes do not “provide for employee vacation pay as of right. Accordingly, when employers choose to offer paid time-off as a benefit, employers and employees can contract for the circumstances under which employees are entitled to paid time-off and payment in lieu of paid time-off [.]”10 The court then held that an enforceable unilateral contract existed between the two parties. The court found that Fresenius’s dissemination of its vacation policy in the employee handbook constituted an offer that was accepted by Lee through her continued employment, applying the standard from the seminal 1983 decision, Pine River State Bank v. Mettille.11

Turning next to section 181.13 to determine whether Lee was owed payment for her accrued vacation time, the court affirmed the lower court’s holding that vacation time does constitute wages. However, rather than stopping there as the court of appeals had done, the supreme court then considered the phrase “actually earned” in the statute. The court held that section 181.13 is a “timing statute, mandating not what an employer must pay a discharged employee, but when an employer must pay a discharged employee.”12 Further, the court opined that the statute should be strictly construed, since its language provides for a civil penalty.

After considering previous vacation pay decisions, the court rejected Lee’s argument “that Minnesota case law has never allowed an employer to refuse to pay a terminated employee benefits that have already been earned and vested.”13 The court held that the contractual nature of vacation benefits allows employers to provide conditions on the use of such benefits, including whether such benefits would be paid upon termination. Ultimately, the court concluded that Lee was bound by the policy’s terms and therefore was not owed any payment for accrued, but unused, vacation benefits.14 Justice Alan Page dissented, advocating an interpretation of the statute similar to that of the court of appeals.15

What Does The Decision Mean?

Vacation policies are important to all employers and one of the few policies most employees carefully scrutinize. Lee’s most immediate effect clearly gives employers the right to set the terms of their vacation policies and the ability to determine whether, if at all, such accrued vacation will be paid upon termination. The court also approvingly cited certain common vacation restrictions. Under Lee, the following vacation policies are clearly allowed in Minnesota: requiring employer pre-approval for use; “use or lose” provisions; accrual caps (setting a maximum level above which an employee no longer accrues benefits); refusing buyback or payment for accrued time upon employee termination; as well as other common policies. This was welcome news for employers and employment lawyers drafting vacation policies.

The opinion’s discussion of employment contracts is also noteworthy, in part because of its brevity. The court devoted a mere four paragraphs to its finding that the company’s employee handbook constituted an enforceable unilateral employment agreement. Since the Minnesota Supreme Court decided Pine River nearly 25 years ago, employers and their lawyers have expended significant effort disavowing any contractual relationships formed by oral or written statements—particularly with regard to employee handbooks. Nevertheless, without elaboration, the Lee court applied Pine River, finding an enforceable unilateral contract without considering any contract disclaimers in the handbook.

It is unclear whether the case’s circumstances caused the court to apply an abbreviated contract analysis or whether the court simply found this point unremarkable. It was, after all, the employer in Lee that argued the handbook constituted a contract, unlike the vast majority of such litigation. It is also possible that most vacation policies have been unilateral contracts all along under the Pine River analysis; yet, this proposition has been tested infrequently in the Minnesota courts. Because Pine River’s standard rests, in part, on the handbook policy’s level of specificity, vacation policies may often contain the requisite “definiteness” to form a unilateral contract, if only as to the benefits described in the policy.16 Finally, the court’s brevity may be due to the fact that contract language is not entirely new to Minnesota vacation pay jurisprudence.17

Ultimately, Lee provides employers with new clarity and freedom in drafting vacation policies. The decision is a boon to employers because it allows them to set the terms of their policies and makes clear that there is no absolute employee right to a payout of accrued, but unused, vacation. The decision’s implications for the Pine River contract analysis are less clear. Regardless of whether the decision is viewed as a modification or straightforward application of that standard, at a minimum, employers should again take notice that handbook policies may be considered unilateral contracts. They should continue to avoid specificity in policies by which they do not intend to be bound. At the same time, as evidenced in Lee, creating a binding contract, at least for certain policies, may be in the employer’s interest.

* Samuel W. Diehl is an employment law attorney with Gray Plant Mooty in Minneapolis. He represents employers in all areas of employment law and litigation.

 

Endnotes

1 741 N.W.2d 117 (Minn. 2007).

2 This article will refer to vacation or other paid time-off benefits interchangeably, as “vacation” or “vacation time.”

3 Minn. Stat. § 181.13 (2007).

4 Lee, 741 N.W.2d at 120.

5 Id. at 121-22.

6 Lee v. Fresenius Medical Care Inc., 719 N.W.2d 222 (Minn. Ct. App. 2006).

7 Id. at 224 (citing Brown v. Tonka Corp., 519 N.W.2d 474, 477 (Minn. Ct. App. 1994)).

8 Lee, 719 N.W.2d at 225 (quoting Winnetka Partners Ltd. P’ship v. County of Hennepin, 538 N.W.2d 912, 914 (Minn. 1995)).

9 Id. at 226.

10 Lee, 741 N.W.2d at 123.

11 Id. (citing Pine River State Bank v. Mettille, 333 N.W.2d 622 (Minn. 1983)).

12 Id. at 125 (emphasis in original).

13 Id. (internal quotation omitted).

14 Id. at 130.

15 Id. at 130-36 (Page, J. dissenting).

16 See Pine River, 333 N.W.2d at 626-27.

17 See, e.g., Brown v. Tonka Corp., 519 N.W.2d 474, 475 (Minn. Ct. App. 1994); Tynan v. KSTP, Inc., 77 N.W.2d 200, 206 (Minn. 1956). 

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