Most HR professionals and business owners probably know—or need to know—that Minnesota Statutes section 181.13(a) makes a discharged employee’s “wages or commissions actually earned and unpaid at the time of discharge” immediately due and payable upon the employee’s demand. Failing to pay wages or commissions within 24 hours after the demand carries a penalty equal to the employee’s average daily earnings for each day the wages or commissions are unpaid, up to 15 days.[1] But what constitutes “wages”?
“[S]ection 181.13(a) is a timing statute that does not create a substantive right to recover compensation[.]”[2] An employee’s right to compensation must arise under some other legal authority, such as an employment contract (including, but not limited to, a unilateral contract created by an employee handbook), for section 181.13(a) to apply.[3] In other words, Section 181.13(a) does not determine what an employee is owed, only when an employee is owed. For example, an employee cannot recover payment for accrued but unused PTO unless the employee handbook governing their employment provides for such a payment.[4]
I. Bonuses
Whether a bonus constitutes “wages . . . actually earned and unpaid at the time of discharge” depends largely on whether the bonus is discretionary, and whether the employer awarded the bonus prior to discharge of the employee. The question of whether a bonus is “wages” is determined by the employee’s contractual arrangement with the employer, not Minn. Stat. § 181.13(a). If the employee was entitled to receive their bonus before they were discharged, generally the bonus will be “wages”. If the employee was not entitled to receive their bonus before they were discharged, generally the bonus will not be “wages”
A discretionary bonus which has not been awarded at the time of discharge likely is not “wages” under Minn. Stat. § 181.13(a). In Chambers v. Travelers Companies, Inc., 668 F.3d 559 (8th Cir. 2012), the court determined that an unpaid $30,000 bonus was not “wages” because all of the employer’s documents “clearly state that the awarding of bonuses is within the discretion of” the employer.[5] The employee in Chambers had received a bonus of $32,000 the prior year, and the employee had received a “Total Compensation Summary” for the year in which she was discharged, listing a $30,000 bonus.[6] The employee also received positive marks on her written performance review earlier in the year.[7] Despite those facts, the court held the bonus was not “wages . . . actually earned and unpaid”, because (1) the “Total Compensation Summary” “prominently stated that it was for informational purposes, did not create a contract, and did not alter any existing contract”, (2) the bonus was discretionary, and nothing indicated that payment of the bonus was mandatory, and (3) the employer’s “policy provided that an employee would be eligible for a bonus only if she was employed on the date bonuses were distributed”, and the employee in Chambers was not employed when bonuses were paid.[8] Similarly, in Knutson v. Schwan’s Home Service, Inc., 711 F.3d 911 (8th Cir. 2013), the employee was not entitled to a bonus because the company policy required the employee to be “employed when the bonus was determined”, and the employee was not employed at that time.[9]
But, where an employee has contracted for a bonus, and that bonus is not discretionary, the bonus likely is “wages” under Minn. Stat. § 181.13(a). In Kvidera v. Rotation Engineering and Mrg. Co., 705 N.W.2d 416 (Minn. App. 2005), the employee entered into a contract providing for an annual bonus as part of his overall compensation based upon certain criteria.[10] There, the court noted that the bonus was not “subject solely to the employer’s discretion” or “gratuitous”, and held “when an employee contracts for a bonus in exchange for his services to the employer, and the right to that bonus vests prior to the employee’s termination”, the employer must pay that bonus in accordance with Minn. Stat. § 181.13(a).[11] The bonus was “wages” because the employee had an undisputed right to receive a bonus.[12] The court in Kvidera held that the bonus had to be paid within 24-hours of the employee’s demand, even though the amount of the bonus had not been determined.[13] Kvidera presents a potentially dangerous pitfall for an employer who guarantees a bonus in an uncertain amount, and there is significant risk and room for dispute regarding the calculation of a bonus following termination of an employee, particularly if the bonus amount is based on subjective criteria, in which miscalculating a bonus could lead to a violation of Minn. Stat. § 181.13(a).
In order to ensure that bonuses are not “wages . . . actually earned and unpaid” and therefore subject to Minn. Stat. § 181.13(a), employers should ensure that their bonus policies are clear that bonuses are discretionary and that employees are eligible for bonuses only if they are employed on the date bonuses are distributed. If certain criteria are provided for bonus calculation, employers should be clear that those criteria are merely guidelines, and that the ultimate decision as to whether to pay a bonus is up to the employer’s discretion. Employers should also ensure that when discussing bonus potential with employees, or prospective employees, they are clear that bonuses are paid out in accordance with company policies, or the employee’s employment contract, and that the potential for a bonus does not guarantee a bonus or alter the company policies or contract. Even still, there may be circumstances in which a bonus may be considered “wages . . . actually earned and unpaid”, where the right to payment accrued before the employee’s discharge. If a bonus is not discretionary, the amount of the bonus should be pre-determined, or subject to only simple, objective criteria, to prevent a potential trap for employers at the end of the employee’s tenure.
II. Paid Time Off
An employer’s liability for vacation time, like bonuses is also “wholly contractual”[14] but unlike a bonus, vacation time generally accrues as an employee works. In most cases, then, where an employee’s contract or an employer’s handbook provides that accrued but unused vacation time or paid time off will be paid out to the employee, the payout is considered “wages” under Minn. Stat. § 181.13(a). In fact, the Minnesota Supreme Court has unequivocally stated “paid time off or vacation pay constitutes wages for purposes of section 181.13(a).”[15] But, the court has maintained that the right to such pay is determined by contract. In Lee v. Fresenius Medical Care, Inc., the employment contract provided that an employee terminated for misconduct is not entitled to payment of earned but unused PTO.[16] Because the employee was terminated for misconduct, and because state law does not require payment for earned but unused paid time off, the court determined that the employee had no right to payment for her unused PTO and there was no violation of Minn. Stat. § 181.13(a).[17]
If Earned Sick and Safe Time had been available in Lee, however, the outcome may have been different, to the extent that the employee sought payment for unused ESST. Like with most paid time off, ESST is accrued with time worked, up to a cap.[18] “[E]mployers must permit an employee to carry over accrued but unused sick and safe time into the following year” up to 80 hours per year, unless the employer front-loads 80 hours or front-loads 48 hours and pays the employee for accrued but unused sick and safe time at the end of a year.[19] In the latter situation, where the employer pays out unused sick and safe time at the end of a year, the ESST payout qualifies as wages. But unlike the PTO payout in Lee, there is a separate statutory right to receive the ESST payout under Minn. Stat. § 181.9446(b)(2). Accordingly, even though the employment contract in Lee provided that no unused PTO would be paid out if the employee is terminated for misconduct, the employee likely would have a right to have her unused ESST paid out. It is likely that any employer who front-loads 48 hours of ESST and pays out the unused ESST at the end of the year must pay out the unused ESST subject to Minn. Stat. § 181.13(a). The question that remains unanswered is whether an employee has “earned” the right to have the ESST paid out at any point during the year, if the payout only occurs at the end of the year. Minnesota courts will likely determine that an employe’s right to an ESST payout is “earned” at the beginning of each year when the employer front-loads the 48 hours of ESST, and therefore an employer must pay out the unused portion of that 48 hours upon termination, regardless of when in the year the employee is terminated.
III. Reimbursement and Per Diem
Per diem, defined as “[a] monetary allowance, usu[ally] to cover expenses” is not considered wages under Minn. Stat. § 181.13(a).[20] Similarly, reimbursements, in the absence of a contractual right to reimbursement, are not “wages”.[21]
IV. Severance payments
Money due to a former employee only after their separation from a company likely are not “wages”.[22] The statutory language is clear that “wages” are monies payable for “time worked at the employee’s regular rate of pay.” Minn. Stat. § 181.13(a). Severance payments are not paid for “time worked”, nor are they necessarily connected to an employee’s regular rate of pay. Furthermore, they are owed only after an employee has separated from a company. In Cole v. Holland Neway Intern., Inc., the court noted that severance benefits, even if they accrue with length of service, are not “owing” until the employee is terminated.[23] Thus, even if a severance was “wages”, it would not be “actually earned and unpaid at the time of discharge.” Similarly, in Nanninga v. Best Buy Co., compensation owed under a severance agreement was not “wages” because the agreement was not signed until after the employee’s last day of employment, and therefore could not “be considered wages at the time of his discharge.”[24] Nanninga, however, leaves open the possibility that payments under a severance agreement entered into before an employee’s last day of work may be “wages” because the payment was “earned” before the end of the employment relationship. However, this risk can likely be mitigated by specifying a date for payment of severance amounts. By doing so, the employer would ensure that the employee does not have a right to payment until the contracted-for date, and therefore no grounds to demand payment prior to that date.
V. Conclusion
In many cases, determining what constitutes “wages . . . actually earned and unpaid at the time of discharge” will be relatively straightforward: what would the employee have been paid for the days they worked, plus what are they entitled to under the employer’s policies for PTO payouts and bonuses. The most nuance comes into play with bonuses, based upon the level of discretion provided and when the right to payment vests. As with many employment law issues, ensuring that you have straightforward and robust policies in place regarding payments upon separation from employment will protect the company from mistakes leading to violations of Minnesota Statutes section 181.13(a). While this article discusses many common types of payments to employees, it does not cover all possible situations, and consulting with counsel is always recommended. Commissions also present a nuanced situation for purposes of Minnesota Statutes section 181.13(a), depending on how the commissions are structured, which this article does not address.
[1] Minn. Stat. § 181.13(a).
[2] Hall v. City of Plainview, 954 N.W.2d 254, 271 (Minn. 2021).
[3] Id.
[4] Id. (“Hall cannot recover his accrued PTO under section 181.13(a) without a valid contract entitling him to payment. Thus, whether Hall can now recover for breach of a contractual obligation under section 181.13(a) depends on whether he established in district court, on remand, that 1) a contract exists and 2) he satisfied the requirements of the Handbook’s PTO payment provision and is owed payment for his accrued PTO under that contract.”) (citation modified)
[5] Chambers, 668 F.3d at 565.
[6] Id.
[7] Id.
[8] Id.
[9] Knutson, 711 F.3d at 917.
[10] Kvidera, 705 N.W.2d at 418, 423.
[11] Id.
[12] Id.
[13] Id. (“While the amount respondent would receive and the appropriate evaluation criteria remained questions of fact, respondent’s right to the undetermined amount vested as of July 1, 2002, the day after the expiration of the 2001 contract).
[14] Brown v. Tonka Corporation, 519 N.W.2d 474, 477 (Minn. App. 1994); Tynan v. KSTP, Inc., 247 Minn. 168, 177, 77 N.W.2d 200, 206 (1956); Lee v. Fresenius Medical Care, Inc., 741 N.W.2d 117, 123 (Minn. 2007).
[15] Lee, 714 N.W.2d at 125.
[16] Id.
[17] Id. at 125–30.
[18] Minn. Stat. § 181.9446(a) (“An employee accrues a minimum of one hour of earned sick and safe time for every 30 hours worked up to a maximum of 48 hours of earned sick and safe time in a year.”)
[19] Minn. Stat. § 181.9446(b)
[20] Schreader v. DC & D Enterprises, LLC, No. A-15-1140, 2016 WL 687493, at *3 (Minn. App. Feb. 22, 2016)
[21] Knutson, 711 F.3d at 916–17 (providing that an employee is not entitled to reimbursement if subject to supervisor approval and that approval is not received).
[22] See Cole v. Holland Neway Intern., Inc., No. A03-609, 2004 WL 503751, at *3 (Minn. App. Mar. 16, 2004); Nanninga v. Best Buy Co., No. 04-882, 2005 WL 8163318, at *14 (D. Minn. Aug. 10, 2005) (payment due under separation agreement signed after former employee’s last day of work “cannot be considered wages earned at the time of his discharge”).
[23] Cole, 2004 WL 503751, at *3.
[24] Nanninga, 2005 WL 8163318, at *14.
