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"New Minnesota Court Decision Underscores Importance of Complying with State Wage Laws," Maslon Whitepaper, August 2003

August 26, 2003

Minnesota, like many states, has laws on the books that restrict employers from making deductions from an employee's pay because the individual owes the employer money. A new decision of the Minnesota Court of Appeals teaches three important lessons about our payroll rules: 1. The statute does not just protect the wages of an hourly worker who has a debt to pay, but safeguards the pay of salaried employees as well; 2. It extends to everybody in the organization, from the lowest paid employee all the way up the ladder to executives; and 3. Employers that do not comply will pay a penalty.

In the new case, Brekke v. THM Biomedical, Inc., decided on August 19, 2003, the plaintiff was a founder, officer, director, and full-time employee of the company. He borrowed $65,000 from the employer and signed two notes promising to repay the debts. Later, because of certain financial issues in the company, Mr. Brekke asked for the loans to be forgiven. The employer declined, and then deducted $60,000 from his salary to recover the amount due on the loans.

Mr. Brekke brought a claim under Minnesota Statute 181.79, which prohibits employers from making certain deductions from an employee's pay without the employee's written, voluntary authorization. A violation of the statute subjects the employer to owing the employee double the amount of the illegal deduction. Mr. Brekke asked for an award of $120,000, and the court gave him what he asked for. In doing so, the court rejected the employer's contentions that salaried employees are not protected by the law, and that employees who wear other hats such as shareholder, director, or officer in a closely held corporation are not entitled to recovery.

Minnesota's wage deduction statute has very different requirements for employers depending on the reason for the deduction. One set of provisions governs employers that want to make deductions because an employee has lost or stolen property, damaged property, or has some other debt. Another deals with employees who borrow money from the employer or make purchases from the employer. There is also a separate provision for employees represented by unions.

The wage deduction laws are straightforward, but technical compliance can be quite tricky and the price for noncompliance can be steep. Any employer that wants to hold an employee accountable for any kind of debt by payroll deduction (from current payroll, final paychecks to terminating employees, and even vacation pay) should understand the law, not only in Minnesota but in any other state in which the employer has employees.


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