The beginning of a new year, or new fiscal year, can often bring changes to a company’s workforce. Many businesses will perform or complete performance reviews and implement compensation changes based on the prior year. The new year can also be a time when employees make moves of their own – new year, new job.

All of this activity can create some thorny questions about a company’s obligations to a departing employee. Let’s say an employee receives a glowing performance review that merits a bonus and a raise for the following year. They are paid the bonus on February 15th and given the raise with an effective date retroactive to January 1st. In the following March, the employee submits notice of their resignation, announcing that their family has decided to move, and they have accepted a new job out of state. Their last day will be April 30th. Can the employer claw back the bonus that was just paid? What about the salary increase?

Minnesota Statute § 181.14 establishes the obligations an employer has to an employee who voluntarily quits or resigns (note that there is a different set of obligations if the employee is terminated), which requires that an employer pay “the wages or commissions earned and unpaid . . . not later than the first regularly scheduled payday following the employee’s final day of employment.” Does that include a raise that was given right before the employee quit?

Unfortunately, the state and federal courts in Minnesota have yet to tackle this question directly. But existing statutes and previous decisions regarding payments owed to departing employees can provide some guidance to employers.

Minnesota Statute § 181.13(a) states that “wages are actually earned and unpaid if the employee was not paid for all time worked at the employee’s regulate rate of pay.” Arguably, an employee paid under their own rate, before the raise was offered, has already been paid their earned wages, and the retroactive raise is simply a bonus. However, there is also a strong argument to be made that since the retroactive raise is attributable to work already done, the wage increase has already been earned.  It is important to note that pursuant to Minnesota Statute §181.79, an employer cannot make deductions from an employee’s wage due or earned without their voluntary written authorization. To pay a retroactive raise and then deduct it because the employee has resigned risks a violation of this statute.

What about the bonus? Whether or not a bonus is considered earned wages primarily depends on the written policies or contracts a company might have regarding bonuses. A purely discretionary bonus may be treated differently than one purportedly tied to specific performance goals. If a bonus is tied to specific performance goals which the employee already met prior to the bonus being paid, courts have held the bonus would constitute earned wages that cannot be clawed back. See, e.g., Kvidera v. Rotation Eng’g & Mrg. Co., 705 N.W.2d 416 (Minn. Ct. App. 2005). But if the bonus is purely discretionary and not tied to specific performance goals, it may not be considered “earned.”

The timing of when a bonus is paid could also be important. In the hypothetical proposed above, the bonus was paid to the departing employee just weeks before their resignation. But what if the bonus is promised but not actually paid before the employee leaves? Does the promised bonus have to be included in the final paycheck required by Minnesota State §181.14? Again, every indication from Minnesota courts is that the answer will depend on the terms of employment, whether established by formal contract, written policy, employee handbook, or some other basis for asserting a contractual right. If the bonus was tied to already-completed performance metrics, or could otherwise be considered “earned,” it likely would have to be paid out. But a written policy or contractual term requiring that an employee be employed on the date the bonus is actually paid in order for it to be considered earned could also be enforceable.

In summary, Minnesota courts recognize that the answers to these questions are highly fact-specific and dependent on the terms and circumstances of an individual’s employment situation. In addition to the courts, the Minnesota Legislature is attempting to provide clarity to this question. Senate Bill 5390, introduced in the most recent legislative session, seeks to include any raises in wages that employees are entitled to during a specific pay period. While it did not pass during the just-completed session, employers should monitor this bill during the next session to see if any further clarification is provided. To avoid risking a wage and hour claim, employers should consult with a knowledgeable attorney before making decisions to withhold or claw back raises and bonuses recently extended to departing employees.

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Matthew Beyer

Matt resolves disputes and litigation for commercial clients in the cleanest way possible. With extensive experience as a commercial and employment litigator, Matt thrives on advocating for clients. His practice includes high-stakes contractual and business disputes; defending and prosecuting employment claims for discrimination,

Matt resolves disputes and litigation for commercial clients in the cleanest way possible. With extensive experience as a commercial and employment litigator, Matt thrives on advocating for clients. His practice includes high-stakes contractual and business disputes; defending and prosecuting employment claims for discrimination, wrongful termination, and wage and hour allegations; and litigating insurance coverage disputes and bad-faith claims. Matt works with a variety of clients concentrated in the technology, manufacturing, and transportation industries, including global corporations and Fortune 500 companies.

Tina Syring

A litigator who prioritizes understanding clients’ business culture, Tina defends clients in labor and employment cases and environmental toxic tort matters. Tina’s employment practice is heavily litigation focused, and she divides her time between emergency, bet-the-company cases and investigations that often involve white…

A litigator who prioritizes understanding clients’ business culture, Tina defends clients in labor and employment cases and environmental toxic tort matters. Tina’s employment practice is heavily litigation focused, and she divides her time between emergency, bet-the-company cases and investigations that often involve white collar allegations, as well as employment litigation involving accusations of discrimination, retaliation, or harassment; wage and hour violations; and wrongful terminations. When litigation occurs, Tina also works with clients on implementing strategies to avoid similar situations in the future.

In addition to her labor and employment work, Tina has significant experience in toxic tort litigation involving major environmental exposures.

Jonathon Duffy

Jonathon defends clients in product liability and labor and employment matters. Jonathon focuses his current practice on product liability and employment law. He defends clients against various chemical exposure allegations and is particularly experienced with mold after representing a military housing provider whose…

Jonathon defends clients in product liability and labor and employment matters. Jonathon focuses his current practice on product liability and employment law. He defends clients against various chemical exposure allegations and is particularly experienced with mold after representing a military housing provider whose properties allegedly contained the substance. His litigation experience also includes mediation relating to employee dismissal after FMLA leave. In addition, Jonathon counsels clients on federal and state employment law, helping them avoid potential litigation. He frequently advises on employee handbooks and necessary revisions after new legislation.