Use It or Lose It - Vacation Pay After Lee v. Fresenius

By: Paul G. Christensen, Esq.

Termination of employment is typically a stressful and disappointing event for both the employer and the employee. For the employer it represents a loss of a human resource asset, loss of an investment in training and accumulated experience along with the possible loss of goodwill among current and future employees. For the employee the termination represents the loss of income, loss of status, loss of relationships with other employees, damage to reputation and fear about the future. The employee wants to be certain that they receive everything owed by the employer and the employer may feel that certain payments to the now former employee are the final insult.

In general, benefits accruing to the account of an employee are payable to the employee upon termination of employment. What happens if the employer states, in advance, as part of the terms of employment that accrued “earned” vacation hours will not be paid in the event of a termination “for cause”? In a recent case, Susan Lee v. Fresenius Medical Care, Inc., the Minnesota Supreme Court determined that accrued vacation hours did not constitute a “wage” and need not be paid to the departing employee under certain circumstances.

Susan Lee became an employee of Fresenius Medical Care, Inc., in 2000. At that time she received a copy of the Fresenius employee handbook and signed an acknowledgement that she had received the handbook. According to the handbook, a Fresenius employee who leaves employment would be eligible to be paid for earned, but unused, vacation time when leaving employment, if the employee were to give proper notice. The handbook went on to say “In addition, if your employment is terminated for misconduct, you will not be eligible for … payment of earned but unused (paid time off) unless required by state law.” “Paid time off” and “vacation hours” were used interchangeably by Fresenius and their employees when addressing this topic.

When Fresenius terminated the employment of Lee in 2002, she had accumulated more than 180 hours of vacation time. Fresenius did not pay Lee for the accrued vacation time and Lee sued Fresenius. While the conciliation court awarded her vacation pay, Fresenius appealed to the district court and prevailed then, Lee appealed the matter to the Minnesota Court of Appeals which held that earned vacation time is governed by a Minnesota wage statute and that Fresenius must pay Lee. Fresenius finally appealed the matter to the Minnesota Supreme Court which held that Fresenius, the employer, need not pay Lee, the terminated employee, because the issue of whether to pay accrued vacation time to a terminated employee in certain circumstances can be addressed through contract rather than wage law.

The Minnesota Supreme Court based its decision its decision on a previous case, Tynan v. KSTP, Inc. where it held that “liability as to vacation-pay is wholly contractual”, and noted that the Court of Appeals came to a similar conclusion in Brown v. Tonka Corp. Based on the facts provided, the Supreme Court found that an enforceable employment contract did exist between Fresenius and Lee, even though the Court recognized that earned vacation pay constitutes wages under Minnesota Statutes. The Court found that the vacation pay in this instance was not an earned wage because employment contract restricted the vesting schedule of the earned pay.

What can we learn?

• Employees should be aware that being terminated for cause may also cause a forfeiture of benefits they once believed to be “earned”.
• Employers should adopt clearly written “vacation time” or “paid time off” policies. These policies may include a “use it or lose it” provision for certainty.
• Where the handbook or contract language is unclear, payment of the accrued vacation hours may be the better alternative in order to avoid legal fees and multiple trips through the court system.
• Employers should frame the description of vacation hours or paid time off in the handbook or contract as a benefit contingent upon future performance required for payment.
• Employers should avoid the use of terms such as “earned wage”, “vacation pay” or “vested benefit”. These and similar terms create the impression of an earned present right to receive.
• For both parties, terminations for cause should be handled with great care, because the stakes are now higher than ever.