Recent Court Decision Renders Thousands Of Minnesota Vacation And Other Benefit Policies Unlawful And, Therefore, Unenforceable

The Minnesota Court of Appeals ruled in August that the Minnesota Wage Payment Act renders unlawful any policy or practice providing for the forfeiture of otherwise accrued wages or commissions (which can include vacation and/or P.T.O., bonuses and other forms of compensation).

The case involved a challenge by a former employee of an employer's written policy that provided for the forfeiture of accrued vacation pay for those employees who were terminated for "misconduct" or who resigned their employment without giving two weeks' advance notice. Relying on a very literal interpretation of the language of the Minnesota Wage Payment Act, the court determined that the policy calling for forfeiture of an otherwise "earned and unpaid" wage or commission (in this case, vacation benefits) went against the express language of the law and, therefore, could not be enforced. The Act provides that wages and commissions "actually earned and unpaid" at the time of discharge are immediately due and owing. The court noted that the statute is without any exceptions for misconduct, lack of notice or any other grounds for not paying. The result of this decision was that the employee was owed his full vacation pay balance accrued at the time of his resignation.

The practical effect of this decision is HUGE!  Thousands of Minnesota employers (and those outside Minnesota but with at least some employees in Minnesota) have language in many of their policies similar to that of the employer in this recent case. Prior to this very recent decision Minnesota courts treated wages and benefits as "wholly contractual" and, therefore, the courts generally  would enforce employers' policies according to their provisions. Now, as a result of this case, forfeiture provisions are unlawful and will no longer be enforced. Besides vacation pay or P.T.O forfeiture language, many employers require that employees continue to be employed at the time certain bonuses are paid out or the bonuses are forfeited, even though they otherwise were earned. Based on the rationale of this recent case it seems that none of these types of provisions, once well recognized as lawful and enforceable in Minnesota, will hold up in court. The result is that departing employees (those terminated or resigning) will be entitled to perhaps thousands more dollars in unanticipated vacation pay and other benefits that are treated as "wages" under the Minnesota Wage Payment Act.

The only solutions to the dilemma created by this decision are either (1) revise policy language so that vacation pay, P.T.O., bonuses and similar benefits do not accrue in the first place, or (2) eliminate any forfeiture terms from handbooks and policies. This approach is necessary because under this  new case, once they are “earned and unpaid” employers in Minnesota may no longer enforce policies or practices that would divest employees of accrued "wages" based on misconduct, lack of notice upon resignation, or any number of similar provisions that exist in perhaps the majority of employee handbooks across the state.

For a copy of this significant decision or for recommendations on its impact on existing policies, employers may contact attorney James Sherman, Managing Shareholder of WP&S's Minneapolis office, at (952) 746-1700 or email: jasherman@msp.w-p.com.