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Minnesota Court of Appeals Rules that Employer's Settlement Payment in an Employment Discrimination Suit Reduces Employee's Unemployment Compensation Benefits
October 2011

By: James B. Sherman, Esq.

As is often the case employees who sue their employer alleging wrongful discharge or discrimination of some kind also file for unemployment compensation benefits. Of course qualifying for benefits is much easier and faster than prevailing in an employment lawsuit and so many such individuals are deemed eligible to receive unemployment compensation benefits from the Minnesota Department of Employment and Economic Development (DEED) even though their agency charges or court claims remain unresolved. However, in one case decided on October 11, 2011, the Minnesota Court of Appeals ordered an employee to repay over $9,000.00 in benefits because a substantial portion of monies she received in settlement of her disability discrimination claims against her employer under the Minnesota Human Rights Act (MHRA), were considered by the court to be "back pay;" i.e. recovery of lost wages due to her discharge.

The case was unique in that the settlement agreement at issue did not state that any of the monies paid to the employee were for back pay or lost wages. Instead, the agreement provided for two payments - one for "emotional injuries" and another equal sum for unspecified damages. The court noted, "[in] employment discrimination cases, payments for nonphysical injuries due to emotional distress are reportable on IRS Form 1099 - MISC, whereas payments for back pay that constitute wages are reportable on Form W-2. The fact that the settlement agreement in the instant case provided for reporting the unspecified payment on a W-2 form was enough for the court (and the DEED, earlier) to conclude the payment was for lost wages which offset against unemployment compensation benefits received.

No doubt plaintiffs and their counsel in employment discrimination cases will want to avoid characterizing any settlement payments as lost wages, or reporting any such payments on a W-2 form. After all, the employee in this recent case had to repay over $9,000.00 to DEED on account of the $18,000.00 she received in W-2 settlement monies - over half that money! However, in any employment case involving discharge, absent full mitigation (i.e. where the employee immediately lands another job of equal or greater pay) lost wages, or back pay, make up a significant part of the remedies available under state and federal discrimination laws such as the MHRA and ADA. Therefore, employers should resist requests by plaintiffs and their lawyers to treat settlements as anything other than wages.

Questions? Contact attorney James B. Sherman in our Minneapolis office at (952) 746-1700, or email jasherman@wesselssherman.com.