Legal Insights Into Restitution in Employment Law

Defining Restitution in Employment

Unjust enrichment is the usual civil form of restitution. A claimant must show that the defendant “has knowingly received or obtained something of value for which the defendant ‘in equity and good conscience’ should pay” (ServiceMaster of St. Cloud v. GAB Business Services, Inc., 544 N.W.2d 302, 306 (Minn. 1996)). A benefit alone is not enough. In Caldas v. Affordable Granite & Stone, Inc., 820 N.W.2d 826, 838 (Minn. 2012), the Minnesota Supreme Court said a claimant must establish “an implied-in-law or quasi-contract in which the defendant received a benefit of value that unjustly enriched the defendant in a manner that is illegal or unlawful.”

Caldas shows the limit. Employees paid $16.28 an hour claimed they were owed a $44.31 prevailing wage under their employer’s contract with the City of Minneapolis. The court held that they could not enforce that contract as third-party beneficiaries, and it rejected their unjust enrichment claim as an attempt to avoid that result. The wage statute has its own rule today: Minn. Stat. § 181.13 lets a discharged employee recover unpaid wages at a rate a contract requires even if the employee is not a party to that contract.

An unjust enrichment claim has more room when no enforceable contract covers what the claimant provided. In Schumacher v. Schumacher, 627 N.W.2d 725, 729-30 (Minn. Ct. App. 2001), a son who managed his parents’ inn said they orally promised him lifetime employment and, on the first parent’s death, the business and its real estate. The district court dismissed his contract claims under the statute of frauds, and he did not brief that ruling on appeal. The Court of Appeals still sent his unjust enrichment claim back for further proceedings because he offered evidence that he made substantial improvements on his parents’ land with their knowledge. Schumacher accepted morally wrong conduct as enough, so it should be read with the stricter statement in the later Caldas decision.

Reinstatement and back pay rest on different law. Under Title VII, a court that finds an intentional unlawful employment practice may order “reinstatement or hiring of employees, with or without back pay” (42 U.S.C. § 2000e-5(g)(1)). The Minnesota Human Rights Act’s remedies, in Minn. Stat. § 363A.29, subd. 5, include “the hiring, reinstatement or upgrading of an aggrieved party, who has suffered discrimination, with or without back pay.” These provisions apply after a violation is found, and neither one asks whether the employer was enriched.

Breach of Contract and Fiduciary Duty

Contract claims and the duty of loyalty often decide these disputes, and they limit when restitution is available.

Breach of Employment Contract

When a valid contract covers the dispute, the claim belongs in contract. The Minnesota Supreme Court has said that “equitable relief cannot be granted where the rights of the parties are governed by a valid contract” (United States Fire Insurance Co. v. Minnesota State Zoological Board, 307 N.W.2d 490, 497 (Minn. 1981)). It has also said that “[a] party may not have equitable relief where there is an adequate remedy at law available” (ServiceMaster, 544 N.W.2d at 305). An employee owed a bonus under an enforceable agreement therefore normally sues for breach of that agreement.

Contract damages have limits for both sides. “In general, extra-contractual damages, including those for emotional distress, are not recoverable for breach of contract except in those rare cases where the breach is accompanied by an independent tort” (Lickteig v. Alderson, Ondov, Leonard & Sween, P.A., 556 N.W.2d 557, 561 (Minn. 1996)). Punitive damages follow the same rule (Olson v. Rugloski, 277 N.W.2d 385, 388 (Minn. 1979)). Lickteig adds that even a malicious or bad-faith motive for the breach does not convert a contract action into a tort action that supports those damages.

Fiduciary Duty Violations

Minnesota employees owe their employers a duty of loyalty. The Minnesota Supreme Court wrote: “Every employment contract encompasses implied duties of honesty and loyalty, which if breached by the employee, results in the employer owing the employee nothing” (Stiff v. Associated Sewing Supply Co., 436 N.W.2d 777, 780 (Minn. 1989)). In Stiff, the trial court found that an employee had embezzled company funds and helped dismantle the company’s records, and the Supreme Court upheld the ruling that he forfeited the commissions he claimed. The employer did not have to prove that the amount stolen equaled the pay forfeited.

Remedies Against a Disloyal Employee

An employer harmed by a disloyal employee may have several options:

1. Compensatory damages: Awards for actual losses, such as lost profits or business opportunities.
2. Forfeiture: A defense to the employee’s claim for pay, as in Stiff, when the misconduct is serious enough.
3. Injunctive relief: A court order stopping the conduct. For trade secrets, Minn. Stat. § 325C.02 provides that “[a]ctual or threatened misappropriation may be enjoined.”
4. Civil theft liability: Under Minn. Stat. § 604.14, a person who steals personal property is civilly liable for its value plus punitive damages of $50 or up to 100 percent of its value, whichever is greater.

An employer should not simply take the loss out of a paycheck. Minn. Stat. § 181.79 bars deducting lost or stolen property or any other claimed debt from wages unless the employee voluntarily authorizes the deduction in writing after the loss occurs or a court holds the employee liable. The statute has limited exceptions, and a violation costs the employer twice the amount deducted. Stiff explains that the statute applies when a disputed deduction is offset against an undisputed wage, while forfeiture applies when the earnings themselves are in dispute.

Calculating Restitution Awards

The measure depends on the claim. Unjust enrichment looks at the value of the benefit the defendant received, and a party who paid full value may have no enrichment at all. In ServiceMaster, the court found no enrichment because the insurer “paid dollar-for-dollar for what it got.” Wage and discrimination claims use the measures in their statutes.

Damages and Interest Rates

Minn. Stat. § 549.09, subd. 1 governs interest on most Minnesota money judgments:

1. Interest before the verdict: On pecuniary damages, interest runs from the start of the action, a demand for arbitration, or a written notice of claim, whichever occurs first. A notice of claim starts the clock only if the action is commenced within two years, and written settlement offers can change the calculation.
2. Awards that earn no interest before the verdict: These include future damages, punitive damages and other noncompensatory damages, and awards no larger than the amount specified in Minn. Stat. § 491A.01.
3. Interest after the verdict: Interest is added from the verdict until judgment is entered. A judgment over $50,000 generally bears 10 percent per year until paid. A smaller judgment bears simple interest at a rate tied to one-year Treasury yields, with a four percent minimum.

Lost Wages and Benefits

A lost pay figure starts with what the employee would have earned, including wages, bonuses, and benefits, and each statute then adds its own rules. Under Title VII, back pay cannot accrue from more than two years before the charge was filed, and interim earnings or amounts earnable with reasonable diligence reduce it (42 U.S.C. § 2000e-5(g)(1)).

Minnesota’s statutes add to the recovery. The remedies in Minn. Stat. § 363A.29, subd. 4 include compensatory damages of up to three times actual damages and damages for mental anguish or suffering. Under Minn. Stat. § 181.13, an employer who does not pay a discharged employee’s earned wages within 24 hours after a written demand owes a penalty of the employee’s average daily earnings for each day of default, up to 15 days. Minn. Stat. § 181.14 sets the timing for employees who quit and a similar penalty. For minimum wage and overtime violations, Minn. Stat. § 177.27, subd. 8 makes the employer liable for the unpaid amount plus an equal amount as liquidated damages.

Punitive Damages Awards

Punitive damages are available only in narrow cases. Minn. Stat. § 549.20 requires “clear and convincing evidence that the acts of the defendant show deliberate disregard for the rights or safety of others.” A complaint cannot seek them at the start. Under Minn. Stat. § 549.191, a party must move to amend the pleadings and show prima facie evidence supporting the claim.

An employer can owe punitive damages for an agent’s act only in the situations listed in section 549.20, subdivision 2, such as authorizing the act or ratifying it while knowing its character and probable consequences. The factors in subdivision 3 include the profitability of the misconduct, its duration and any concealment, the defendant’s conduct on discovering it, and the defendant’s financial condition. The court must review the award against those factors and make specific findings. The Human Rights Act separately limits punitive damages to $25,000 (Minn. Stat. § 363A.29, subd. 4).

Employer Liability and Defenses

An employer facing a restitution claim has several responses:

1. A valid contract or an adequate legal remedy: Under United States Fire and ServiceMaster, either one can defeat an equitable claim.
2. No unjust enrichment: The employer may show that it paid fair value for what it received, or that it did not benefit in a way Caldas treats as illegal or unlawful.
3. Time limits: A claim for the recovery of wages must be brought within two years, or three years if the nonpayment was willful and not the result of mistake or inadvertence. Minn. Stat. § 541.07(5) defines wages to include commissions and bonuses. A claim on a contract or other obligation, express or implied, generally has six years unless another limit applies (Minn. Stat. § 541.05, subd. 1(1)). A Human Rights Act claim generally has one year (Minn. Stat. § 363A.28, subd. 3).
4. Wages not earned: The employee carries the burden of proving the earnings claimed, as Stiff shows. When an employer disputes the amount, a good-faith tender of what it believes is due can limit its liability under Minn. Stat. § 181.14, subd. 3.

Employee Remedies and Limitations

An employee usually has a stronger claim under a contract or statute than under restitution. Because a party with an adequate legal remedy cannot get equitable relief, an unjust enrichment claim is often a fallback. A wage claimant can sue directly in district court under Minn. Stat. § 181.171, which also allows compensatory damages, injunctive relief, and attorney fees for violations of the listed wage statutes. Unpaid wage claims often start with a written demand, because that demand starts the 24-hour period under section 181.13.

Limits still apply. Time limits run as described above, and an employer may raise a signed release or waiver as a defense. For minimum wage and overtime claims, section 177.27, subdivision 8, provides that an agreement to work for less than the applicable wage is not a defense.

Frequently Asked Questions

Can Employees Claim Restitution for Unpaid Bonuses or Incentives?

Usually the claim is for breach of contract, because a valid contract displaces unjust enrichment. Unjust enrichment is a fallback when no enforceable agreement covers the bonus and the employee can meet the Caldas standard. Because Minn. Stat. § 541.07(5) defines wages to include commissions and bonuses, a claim to recover them generally must be brought within two years, or three years if the nonpayment was willful.

Is Restitution Available for Wrongful Dismissal or Unfair Termination?

Restitution is not the usual remedy for a firing. A discharged employee normally relies on a contract, the final pay statute, or an employment statute. Under Minn. Stat. § 181.13, earned wages and commissions are due on written demand after a discharge. For proven discrimination, the remedies can include reinstatement with or without back pay.

Do Confidentiality Agreements Impact Restitution Claims in Employment?

They can. For trade secrets, Minn. Stat. § 325C.07 displaces conflicting restitutionary law on misappropriation but leaves contractual remedies in place, so an employer can still enforce a confidentiality agreement. Under Minn. Stat. § 325C.03, trade secret damages can include unjust enrichment not already counted in actual loss, and willful and malicious misappropriation can add exemplary damages of up to twice that award.

Can Employers Recover Restitution for Employee Theft or Fraud?

Yes, through either a civil or a criminal case. An employer can bring a civil lawsuit, including a theft claim under Minn. Stat. § 604.14, which does not require a criminal complaint or conviction. In a criminal case, Minn. Stat. § 611A.04 gives a crime victim the right to receive restitution if the offender is convicted, and Minn. Stat. § 611A.01 includes a corporation that incurs loss as a victim for this purpose. The order is docketed as a civil judgment.

Are Restitution Awards Taxable for Employees in Employment Disputes?

Usually yes. Gross income means “all income from whatever source derived,” including compensation for services (26 U.S.C. § 61(a)). 26 U.S.C. § 104(a)(2) excludes damages, other than punitive damages, received on account of personal physical injuries or physical sickness, and emotional distress does not count as a physical injury except for amounts paid for related medical care. A recovery for lost pay with no physical injury behind it does not fit that exclusion.