Settlement Payments May Not Delay Unemployment Benefits

Typically, an employee receiving a lump sum payment under a separation or settlement agreement must wait for a period of time to receive unemployment compensation. However, a recent Minnesota Court of Appeals ruling means that in certain instances, separation pay will no longer delay a claim for unemployment benefits. Moore v. Waterstone Capital Mgmt. L.P., 2013 Minn. App. Unpub. LEXIS 803 (Minn. Ct. App. Aug, 26, 2013).

Separation Payments

William Moore earned $175,000 per year plus an annual performance bonus while working for Waterstone. The bonus was generally paid in installments over the subsequent three years.

Shortly after his termination in June of 2012, Moore received $650,000 for performance bonuses that he earned in his last year of work. Approximately two months later, Moore and Waterstone entered into a settlement agreement that included an additional $100,000 to settle “all payments under [Moore’s] Employment Agreement” and to release Waterstone “from any and all claims, damages and expenses whatsoever arising under, or in connection with, [Moore’s] Employment Agreement.”

DEED Delays Unemployment

Moore filed for unemployment benefits from the Minnesota Department of Employment and Economic Development (“DEED”) and was awarded a weekly benefit of $597. However, upon learning of the $100,000 settlement payment, DEED concluded that Moore had received “severance” and ordered that his unemployment benefits be delayed for three months. Moore appealed, claiming that the payment was in return for his waiver of legal claims and “notice pay, severance pay, retention bonus, vacation pay or a lump-sum pension payout,” all of which will delay the payment of benefits under Minnesota’s unemployment compensation law.

The unemployment law judge (“ULJ”) rejected the appeal, finding that both the bonus payment and the settlement amount delayed Moore’s unemployment benefits, making him ineligible until December 13, 2015. As a result, Moore was ordered to return more than $19,000 in previously paid unemployment benefits. Moore appealed again, this time to the Minnesota Court of Appeals.

Only Certain Payments Delay Unemployment Benefits

The Appeals Court “split the baby,” finding that while the bonus payments did delay the unemployment benefits, the $100,000 “settlement payment” did not. The Court explained that under the statute, only certain types of payments at separation delay eligibility for unemployment benefits. Such payments include “bonuses,” “back pay,” and “severance payments.” Obviously, the bonus that Moore received fell into that category, and therefore quite properly was considered a basis for delaying the receipt of benefits.

The “settlement payment,” however, was not a “bonus” because the settlement agreement clearly stated that Moore had already been paid all of the bonus that he was entitled to receive. It also was not “severance pay,” which the Court defined as “[a] sum of money usually based on length of employment for which an employee is eligible upon termination.” In this case, the settlement amount did not correlate with Moore’s length of employment. In fact, the payment was not related to any past or future services at all. Instead, it was simply the quid pro quo for Moore’s release of claims.

Accordingly, the court reversed the portion of the ULJ’s decision finding that Moore’s eligibility for unemployment benefits was delayed as a result of the settlement payment.

Bottom Line

When negotiating separation packages, it is important for Minnesota employers to understand the unemployment implications of any separation payments. If the employer seeks to delay the former employee’s eligibility for unemployment benefits (which is usually desirable from the employer’s perspective), the employer should ensure that the payment is in the form of “bonus pay” or “severance pay.” Any agreement reflecting payment should use these terms explicitly and, in the case of the latter, the payment should seek to somehow correlate with the employee’s length of service.

No doubt, attorneys for terminated employees will fight hard to characterize these payments as “settlement payments” or other similar terms that underscore the fact that the payment is not compensation for services. This distinction will be important in determining the ultimate cost of any settlement, and may be useful as a bargaining chip in any negotiation of an employee’s departure.