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Does your employee handbook create an employee contract?

The answer might surprise you!

By Larry Morgan, MAIR, SPHR, SHRM-SCP, GPHR and Phyllis Karasov, Esq.

Virtually all employee handbooks contain the statement, “This handbook is not a contract.” Most employers assume with this contract disclaimer none of the policies and provisions in their employee handbook constitute a contract.

On Feb. 3, 2021, the Minnesota Supreme Court held in Hall v. City of Plainview that a general disclaimer that a handbook should not be construed as a contract may not be effective to prevent a paid time off (PTO) policy contained in the handbook from forming a contract.

Findings

The court first found that the handbook contained sufficiently definite terms to create an offer for a unilateral contract for PTO. The court reasoned that the handbook detailed an overview of the objectives of the PTO program, a PTO accrual schedule based on employee seniority and hours worked per year, instructions on how employees could use their PTO, procedures for rolling over PTO year over year and procedures by which departing employees could cash out PTO.

Further, Plainview relied on the handbook's terms when it initially denied payment of the employee's accrued PTO benefits. These provisions, the court reasoned, amounted to, "More than general statements of policy; rather, they provide[d] specific information and procedures by which employees [could] comprehend and take advantage of the City's PTO program."

The city argued that the handbook disclaimers meant that none of the provisions in the handbook, including the PTO provisions, created an enforceable contractual right. The court disagreed. The court first stated that the disclaimer did not affect the employee's rights to be paid PTO. Next, the court examined a statement in the handbook that it set a "uniform and equitable system of personnel administration" and "should not be construed as contract terms." The court found that the second disclaimer was broad and general and was ambiguous with respect to its applicability to the PTO policy.

The Minnesota Supreme Court clearly stated that an employer is not required to provide employees with paid time off, unless required by a statute, such as paid sick and safe time. However, if paid time off is offered, it is critical that handbook policies regarding paid time off discuss any applicable restrictions on payment for unused time off. If the policy makes a promise that employees will be paid for unused paid time off, that promise may be a contract.

The court did not decide whether the paid time off policy in the city of Plainview’s employee handbook constitutes a contract. The court said that whether Hall is entitled to be paid for his 1,778.73 accrued PTO hours is based on a contractual right. Hall could not recover his accrued PTO without a valid contract entitling him to payment. The case was remanded to district court to decide whether a contract exists and whether Hall satisfied the requirements of the handbook’s PTO payment provision and is owed payment for his accrued PTO under that contract.

What does this case mean for Minnesota employers? 

The case reminds us that employers must comply with the paid time off policies in their handbook. If the employer does not pay separating employees for unused paid time off, they should clearly state this fact in the employee handbook. It is not required that employees in Minnesota be paid at termination for unused paid time off. If there are restrictions on the circumstances in which unused paid time off will be paid (i.e., employees will be paid for up to a specified number of hours of unused PTO regardless of how much they accrued), the handbook should state such restrictions. The problem in the city of Plainview handbook was that the city refused to pay any PTO to Hall, despite the fact that the handbook stated that some or all of unused PTO would be paid when an employee ends their employment with the city, for any reason.

Employers should review their handbooks, application forms, offer letters and policy statements for language that could create a potential right to benefits, and give rise to claims of contractual employment obligations or the inability of the employer to modify programs. 

Failure to pay employees for unused paid vacation, sick leave and PTO when the limits or restrictions for such payment is not specified in the employee handbook, could constitute wage theft under local and state law. Thus, failure to comply with an employee handbook policy on paid time off can expose the employer to a claim of wage theft if employees are promised they will be paid for unused paid time off and they are not.

Review policies for the following

While not addressed specifically in the court case above, employers should review their employee handbook, offer letters, policy manual and other related documents to include language such as the following:

  • Specific and clear descriptions as to whether separating employees will be paid at termination for unused accrued paid time off, including PTO, sick time and vacation. If employees are to be paid for such unused time, up to specified limits, such limits should be expressly stated.
  • Employers who allow carryover of PTO or vacation into the next year should consider restricting the accrual of additional paid time off once a specified limit has been reached. This will limit the amount of unused paid time off an employee can accrue.
  • The offer letter, handbook and other documents do not constitute an employment contract.
  • A statement regarding employment is “at will” and either party may terminate employment at any time, and for any reason provided that no local, state or federal laws are violated.
  • The employer reserves the right to change, amend, modify or terminate employee compensation and benefit programs at any time (unless protected under a collective bargaining agreement).
  • For multistate employers, continued monitoring of state regulations and a statement that “in the event of contrary local or state regulations, those regulations will apply.”
  • Employers with employees in Minneapolis, St. Paul and Duluth should ensure compliance with the safe and sick leave benefit requirements.
  • Employers may wish to provide clear guidance on use and carryover of paid leave benefits including following the Minnesota expansion of sick, vacation and PTO for employee relatives.
  • Disclaimers in offer letters and stated several times within the handbook.

 

HR Hotline is here for you

Do you have more questions on this topic? Reach out to Larry Morgan at the MNCPA HR Hotline at hrhotline@mncpa.org. You may also contact Phyllis Karasov at 952-896-1569 or pkarasov@larkinhoffman.com.