Do Employees Need to Be Paid For Unused Vacation or PTO Upon Termination Under Minnesota Law?
Not necessarily. The Minnesota Supreme Court addressed this question in Lee v. Fresenius Medical Care, Inc., 741 N.W.2d 117 (Minn. 2007). The Court held that, under Minnesota law, vacation or paid time off (PTO) is “wholly contractual.” Accordingly, employers are permitted to set conditions that employees must meet in order to exercise their earned right to vacation time with pay, whether in the form of actual paid time off or payment in lieu of paid time off.
As a result of the decision in the Lee case, an employer may limit the circumstances under which a terminated employee receives payment for unused PTO or vacation. For example, an employer may only agree to pay employees for PTO if the employee voluntarily resigns and provides at least two weeks notice of the resignation. In this circumstance, employees who are involuntarily terminated or employees who resign without providing sufficient notice would not be eligible for payment for unused PTO or vacation.
Employers may also have use-it-or-lose-it policies for PTO or vacation. Under a use-it-or-lose-it policy, an employee may be required to use PTO or vacation by a certain date (e.g., December 31st) or forfeit the PTO or vacation. The Court in Lee recognized that use-it-or-lose-it policies are important for employers who want to encourage employees to use PTO or vacation to refresh or re-energize, particularly in high-stress occupations.
Takeaway: Under Minnesota law, employers may impose conditions on an employee’s right to receive payment in lieu of PTO or vacation. To avoid confusion, an employer’s policy should clearly define the circumstances, if any, under which an employee is eligible for payment in lieu of PTO or vacation. The policy should also address what happens to unused PTO or vacation when an employee is terminated.