Recent shifts in the statutory and common law landscape have altered
the contours of unemployment compensation law in Minnesota, a territory that has seen heightened activity as unemployment has increased.

by Marshall H. Tanick and Brian R. Dockendorf

Unemployment compensation, which has been a staple in the United States for three generations, usually does not attract much attention from the legal community. The process of seeking or contesting eligibility for unemployment compensation benefits for people who have lost their jobs generally proceeds at a desultory pace.

But a number of recent developments, including statutory changes and landmark court rulings, have significantly altered the landscape of unemployment compensation law. The current contours of unemployment compensation law in Minnesota differ significantly from those only a few years ago. These changes are increasingly important as increases in joblessness have been followed by increased unemployment compensation claims to pursue and defend.

System Synopsis

The system for unemployment compensation is much the same as when originally enacted as part of the New Deal legislation in the 1930s. Generally, the process exists to provide benefits to persons out of work, through no fault of their own.

The program is the result of a unique federal-state partnership based on federal law but administered under state law. Federal law and the federal government designate certain requirements (including conformity and substantial compliance with state laws and regulations), provide money for proper administration, and hold and invest all money in the unemployment trust fund. In contrast, states determine the specific qualifications for benefits and benefits amounts, take claims from individuals, assess and collect contributions, determine employer liability, and ensure timely payment.1

Financing for the program comes from a combination of federal and state taxes levied on covered employers. Almost all employers who pay state unemployment tax must also pay federal unemployment taxes. Most employers pay quarterly unemployment tax.2 The current federal tax rate is 6.2 percent on wages up to $7,000 paid to an employee.3 The state of Minnesota also assesses and collects taxes and there is a complicated system of credits and offsets.

On July 1, 2003, the Minnesota Department of Economic Security and the Minnesota Department of Trade and Economic Development merged to form the Minnesota Department of Employment and Economic Development ("deed"), the governmental body that currently administers the program.

Statistical Summary

Statistics show that increasing numbers of Minnesotans are using the process. There were 203,480 initial claims filed in 2000, and 302,676 in 2001: nearly a 50 percent increase in a year. The increasing numbers have not abated. There were 316,572 initial filings last year, and the number jumped to 188,918 through July of 2003, increasing at a clip of about 27,000 per month and on pace for approximately 324,000 this year.4

Although most filings are uncontested, an appreciable number breed legal challenges. About 5 percent of new claims that are denied or granted by intake personnel trigger contested proceedings before an unemployment law judge.5

The number of contested hearings before the Department of Economic Security has also grown rapidly, doubling from 9,050 in 1999 to more than 18,000 in 2002. In 2002, 18,292 appeals were brought to an unemployment law judge, and 3,520 to the commissioner. The department found against 8,660 employees, and in favor of 3,697 employees. It ruled against 3,521 employers and for 2,413 employers appealing claims. The ratios translate into a 30 percent success rate on initial appeal for employees, and a 40 percent success rate for employers on initial appeal. Of claims appealed, approximately 52 percent were "misconduct" cases, 27 percent "quit" cases, and the remainder "other" issues.6

The outcome of such proceedings may be appealed within 30 days to the Office of the Commissioner. Applying a narrow standard of review, the commissioner usually upholds the rulings. In 2002, of 3,520 appeals to the commissioner, only 735, or approximately 20 percent, were reversed.

The next, and usually final, step in the process is an appeal by certiorari to the Minnesota Court of Appeals. Unemployment appeals recently have comprised roughly 6 percent of the court's docket, or slightly more than 100 unemployment appeals a year. The court has generally affirmed 90 percent or more of the administrative rulings: 91 of 100 in 1999; 89 of 103 in 2000; 67 out of 75 in 2001; 38 out of 45 in 2002; and 60 out of 69 through the summer of 2003.

Appeals to the Supreme Court are rare. Most cases do not make it that far for financial reasons, coupled with the Court's crowded docket. The Supreme Court rarely accepts a petition for review in these cases, sometimes going years without adjudicating an unemployment case, although it decided a pair of them in 2002.

Compensation Changes

The most recent changes in the unemployment compensation system date back to 1996, when the Legislature significantly changed the statute setting eligibility standards for unemployment compensation benefits. Prior to that time, the statute was silent regarding which employee behaviors would warrant disqualification for benefits. As a rule, the statute was liberally applied for the benefit of employees, meaning that, in most cases, employees won.

The hallmark for this outlook of lenity was the Tilseth doctrine, articulated by the Supreme Court in Tilseth v. Midwest Lumber.7 The Court in Tilseth held that an employee is not disqualified for "misconduct" unless the worker's conduct reflects "willful or wanton disregard, wrongful intent or evil design", or "intentional and substantial disregard of the employer's interests." However, the Court went on to note that "mere inefficiency, unsatisfactory conduct" or "good-faith errors in judgment or discretion" do not preclude benefits.

Also embedded in the Tilseth doctrine is the principle that "isolated instances" of improprieties do not lead to disqualification. The so-called "hot-headed doctrine" allows benefits despite a sporadic incident that is uncharacteristic of the employee's overall job performance.

The Tilseth doctrine recognized the frailties of human nature and represented a measure of lenity for displaced employees. Yet, it was only invoked sparingly and upheld rarely. For example, the doctrine was successfully invoked in McCoy v. Spicer Off-Highway Axle Div. by an employee who threw a hammer at the floor during a dispute with a supervisor, 8 in Norman v. Rosemount, Inc. by an employee who tossed a crumpled piece of paper at a boss and walked away from him, 9 and in Oman v. Daig Corp. by an employee who pushed a coworker's chair, pulled his hat, and threw a small plastic object at him.10

In 1996, the Legislature codified the common law Tilseth standard by defining the type of "misconduct" that disqualifies employees from reemployment benefits as "intentional conduct showing a disregard of: (a) the employer's interest; (b) the standards of behavior that an employer has the right to expect of an employee; and (c) the employee's duties and obligations to the employer."11

Despite the statute, Minnesota courts tended to rely upon the Tilseth standard in adjudicating "misconduct" issues in reemployment compensation cases. But that practice came to an abrupt halt, as did the hot-headed doctrine, in Isse v. Alamo Rent-A-Car.12 In Isse, the Court of Appeals ruled that an employee was ineligible for reemployment benefits after getting into a fracas with a coworker on the job. The employee was making a telephone call to arrange a medical appointment for his wife when he was summoned back to his work site by a coworker. An argument ensued, with the employee who had been on the phone grabbing the coworker by his shirt, pushing him against the wall, and uttering an epithet. Another coworker broke up the brief episode and stability was restored.

The employer subsequently fired the employee who had shouted and shoved. The fired employee, who had an exemplary work record, claimed that the altercation was simply an isolated occurrence that fell within the "hot-headed doctrine."

The employee prevailed in a contested unemployment compensation hearing, but the commissioner of economic security, in a rare move, reversed the ruling. The Court of Appeals sided with the commissioner, in the process rejecting the "hot-headed" claim and eviscerating the doctrine. It reasoned that the absence from the statute of the term "isolated instances" -- which was part of the Tilseth standard -- evidenced a legislative intention to abrogate the hot-headed doctrine.

The determination in Isse not only dismantled a long-established doctrine of unemployment law, but also reflects a much more stringent outlook on unemployment compensation cases. By imposing a stricter standard on employees, Isse makes it easier to disqualify them for unemployment benefits. This approval seems to conflict with a ruling of the appellate court in Bazi v. Nolan,13 in which the court overturned an injunction against an individual who called another individual a "jerk." The court reasoned that "a single word or gesture" is not sufficiently grave to invoke equitable relief, recognizing the type of human imperfection underlying the hot-headed doctrine.

Isse is not an isolated incident. The Court of Appeals has applied the heightened statutory standard to deny benefits to others.14

Another legislative change occurred more recently. In 2001, the statute was amended to restrict benefits to employees who have received most types of employer-based termination payments. The measure, Minn. Stat. ¤268.085, subd. 3(a)(1), now provides that unemployment compensation benefits will be offset by any payments upon termination received by displaced employees from their employer, including severance, sick pay, bonus, settlements, or other emoluments considered "wages" for income tax or Social Security purposes. Specifically, the payments are deducted in full to the extent they cover all, or part, of the first four weeks of regular pay; one-half of any additional payments also are deducted. As a result, many claimants receiving a sizeable severance payment may lose their unemployment benefits for the first four weeks and then be entitled to benefits only every other week during the remainder of the 26-week eligibility period.

The statute is being enforced more rigorously these days, largely because of the run on unemployment compensation funds that has accompanied the latest round of corporate downsizing. Department personnel generally are treating any compensatory payments, regardless if accompanied by a release of claims, as encompassed by the statute and, therefore, disqualifying employees from benefits for the applicable time periods.

There are some alternatives for displaced employees, however. The timing of a settlement can be structured in such a way that payments are classified, in whole or in part, as being nontaxable -- although this arrangement is problematic because of the tightening tax laws that make nearly all job-related payments taxable under Sec. 104(a) (2) of the Internal Revenue Code in the absence of some type of "physical injury." Another approach would be to use accumulated sick or vacation pay to extend the time the employee is on the payroll, thus reducing or eliminating any offset once unemployment benefits are claimed.

Even employees who are disqualified from benefits during the 26-week unemployment period due to receipt of severance will still be eligible for benefits after the 26 weeks expire. Although few employees remain without work for 26 weeks, they are entitled to unemployment benefits for the maximum period of joblessness after the expiration of the first 26 weeks.

"Misconduct" Matters

At the heart of the unemployment compensation process are "misconduct" cases, which comprise about 25 percent of all contested cases and the bulk of those that end up at the appellate court. The battleground in these cases is whether the employee committed statutory "misconduct," which disqualifies the claimant from benefits.

Last year, the Supreme Court took its first opportunity to construe the new "misconduct" statute in light of the codification of the Tilseth doctrine. In a pair of concurrently decided cases, the Court alternately granted and denied benefits under the "misconduct" provision.

In Houston v. International Data Transfer Corp.,15 an employee who was allegedly rude to a customer was disqualified from benefits after a reversal on appeal to the commissioner. The Court of Appeals affirmed the decision, holding that Tilseth was no longer good law. The Supreme Court reversed, holding that intentional conduct had to be "deliberate" and not "accidental." The Supreme Court held there was nothing to indicate the employee intentionally ignored or paid no attention to her duties and therefore was not disqualified from benefits.16

In Schmidgall v. Filmtec Corp.,17 the Supreme Court ruled that an employee committed disqualifying "misconduct" by failing to promptly report a workplace injury, as required by company policy. The Court reasoned that where an employee knowingly and deliberately refuses to carry out a directive of the employer even a single violation may constitute misconduct, especially where the employer has a substantial interest in maintaining a safe workplace.18

Quixotic Quitters

Unemployment benefits are not available for those who voluntarily resign their jobs. In many instances, those employees who quit and seek unemployment compensation benefits are like Don Quixote tilting at windmills.

Under Minn. Stat. ¤268.09, subd. 1(a)(1), employees who resigned can obtain benefits if they did so for "good reason" attributable to the employer. The failure to take action against sex harassment can be one such employer-induced cause.19

But on most occasions, quitters are losers when they seek unemployment benefits. A spate of cases decided earlier this year reflect that reality. An employee who was a notary public, who objected to being asked to acknowledge a signature that she did not personally observe, was denied unemployment compensation benefits after she quit her job in Kruger v. New Era Financial Group, Inc..20

In Kruger, an office manager of a brokerage business, who was the only notary public in the office, regularly notarized signatures without having personally witnessed them. Those acknowledgments violated Minn. Stat. ¤359.085, subd. 3, which requires that a notary public must determine "from personal knowledge or from satisfactory evidence" the legitimacy of a signature.

After a number of performance-related criticisms from her boss, she then refused to acknowledge any more signatures as a notary, pointing out the illegality to her boss, who thought it was "common practice" in the brokerage industry to do so. Due to concerns about her clerical skills, she was given a 30-day period during which she would need to improve her skills, accept a new position that would require less clerical work, or be terminated. The woman then complained that she had been sexually harassed by a coworker at about the time that she refused to notarize a document that had not been signed in her presence. The boss later changed the company's notarization procedure, no longer requiring the office manager to notarize documents.

The employee quit a few weeks later and sought unemployment compensation benefits on the grounds that she had "good reason" to resign. She lost at all three levels. Her application was denied on the grounds that she voluntarily quit; an unemployment compensation judge affirmed the denial, and the commissioner of the Department of Economic Security agreed, upholding the denial of benefits.

The Court of Appeals affirmed, holding that the employee lacked "good reason" to quit. The company's change in its notarization policy after being informed of its illegality negated any "good reason" for the employee to quit.

While there is a "public interest in the validity of notarized documents," the record did not reflect that the office manager quit because she was "under pressure" from her employer to "notarize documents illegally." Once she informed management of her objection, she was no longer requested to notarize documents that had not been signed in her presence. Therefore, her resignation was not attributable to her "adhering to her legal and ethical obligations as a notary public." 21 The employee's harassment claims also were rejected because she did not assert that inappropriate conduct of coworkers and sexual comments constituted "a separate basis" for her to quit.

An employee whose salary and benefits were reduced by 15 percent was not entitled to her unemployment benefits when she quit her job in DeNio v. Interchange Inc..22 The employee was given a large boost in pay and enhanced fringe benefits to induce her and three other employees to purchase the company. When they made an offer to do so, the owner, an 83-year-old man, deemed the proposal too low and withdrew the offer to sell. The owner then slashed the employee's salary by about 10 percent and, due to economic problems, instituted an across-the-board policy requiring employees to contribute about 25 percent of the cost of some fringe benefits and suspended paid time-off.

The employee resigned, claiming a "hostile work environment," which included the pay cut, change in benefits, and "repeated inappropriate touching" by the boss. She was granted unemployment compensation benefits and later prevailed before an unemployment law judge in an appeal by the employer. However, in a rare reversal, the commissioner overturned the decision and ruled that the employee was ineligible for benefits.

The Court of Appeals concurred, upholding the commissioner's determination that the employee did not qualify for benefits under the "good reason" for quitting statute. While the 15 percent reduction in salary and benefits constituted sufficient grounds to qualify for unemployment benefits after quitting, the employee did not quit for that reason. The evidence reflected that the pay cut was not the basis for the employee's decision to resign.

The company-wide suspension of paid time off and increase of employee contributions to fringe benefits did not constitute "good reason" to quit because those policies "were applicable to all employees," not solely the claimant. The alleged sex harassment also did not constitute "good reason" to quit. While an employer is obligated to investigate claims of sexual harassment if an employee complains, the claimant never indicated that she was offended by "physical contact" such as periodic handholding, hugging, and other contact by the elderly employer. Because she did not object, the employer had no duty to investigate and, therefore, the employee lacked "good reason" to quit.

Another reduction in compensation was insufficient to constitute "good reason" to resign in Morse v. Cleary Building Corp..23 A sales representative, whose employment agreement allowed a salary reduction for not meeting quotas, quit after his base salary was cut in half because of high expenses and low sales. As in the DeNio case, the commissioner reversed an unemployment judge's ruling in favor of the employee. The appellate court agreed, holding that the employer was justified in reducing the salary "in accord with the unambiguous format" in the contract. The employee had been given a warning and allowed three months to meet his quota, which warranted the decrease in salary.

The court rejected the contention that the agreement had been orally modified by a supervisor's statement that the salesman's salary would not be cut if "you're making some sales," which was too vague "to indicate an intent to modify the agreement." Because the employer "did not modify the employment agreement," the employee lacked "good reason" to quit and thus, was ineligible for unemployment benefits.

Yet another worker who quit because of dissatisfaction with compensation also was denied unemployment benefits in Renstrom v. Kieger Enterprises.24 A commercial driver, who expressed unhappiness with his compensation, resigned and then sought unemployment benefits, claiming he was harassed by being forced to work excessive hours.

The Department of Economic Security denied his claim, as did the Court of Appeals. It reasoned that he quit because he was dissatisfied with his "rate of pay" and not excessive work hours. The driver told his boss he had another job lined up and would stay only if he was paid more. He rejected a raise and then quit without ever complaining of too many hours, although he had refused "to work more hours." Therefore, his displeasure with his compensation did not "constitute good cause to quit."

Recent Rulings

Several recent unemployment compensation rulings have addressed other interesting and important issues.

While the employees in DeNio, Morse and Renstrom were found not to qualify for benefits after quitting over claimed compensation shortages, the employee in Hayes v. K-Mart Corp.25 qualified for unemployment benefits after not receiving a raise.

The employee talked with her manager after she felt she was due a job performance raise in wages. Her manager stated "he would do something about a raise" and later told her "he would take care of it before he left" the store for new employment. The employee did not get the raise and quit. The unemployment law judge and the commissioner determined failing to get the pay raise did not constitute "good reason" to quit and disqualified the employee from unemployment benefits.

The Court of Appeals reversed, deciding as a matter of first impression in Minnesota, that a "failure to grant the raise constituted a substantial breach of the employment agreement" and thus, constituted "good reason" to quit.

The employee in Risk v. Eastside Beverage26 learned that risks with alcohol and unemployment benefits do not mix. In Risk, a delivery truck driver worked for a company that distributed alcoholic beverages. The employee had a driving accident on the job while in his delivery truck after drinking the night before. The employee tested positive in a field sobriety test for alcohol with a concentration level of .07 and was later terminated. After the unemployment law judge determined the employee eligible for unemployment benefits the commissioner reversed the decision.

The Court of Appeals affirmed. Even though the employee was never convicted of any criminal dwi, and never lost his license, the court determined he committed "intentional misconduct" where the employer had a legitimate interest in having its trucks operated by drivers not impaired by the effects of alcohol. For such employees, the court commented that there is "zero tolerance" for driving under the influence with so many lives at risk.

Finally, in Atkinson v. Qwest Corp.27 an employee, subject to her coworkers' continuous harassment, that included putting tacks and two-inch pins on her chair, finally confronted one of the coworkers. She swore at the coworker and touched the coworker on both sides of her face while telling her to stay out of her space. The company terminated the toucher for violation of the company policy against violence.

The unemployment law judge determined the employee's action constituted employment "misconduct" and the commissioner affirmed. The Court of Appeals reversed the decision because the employee testified that she had never considered that her actions violated the company's violence policy. The court also held the record did not demonstrate the touching forceful enough to constitute a slap or a hit, although the court specifically noted it did not condone the action.

Compensation Conclusion

Statutory changes and case law developments have modified the unemployment compensation system markedly in recent years in Minnesota. The heirs of the system bequeathed by their grandparents, or even their parents, do not face the same process as the one that their progenitors dealt with in times of joblessness.

These developments may portend even more changes in the future as the children of the current generation claim and challenge the right to receive unemployment compensation benefits. M

Notes
1 http://workforcesecurity.doleta.gov/unemploy/pdf/partnership.pdf

2 http://www.mnworkforcecenter.org/tax/hdbook/ut.htm

3 26 U.S.C. ¤3301.

4 These statistics were obtained from the Minnesota Workforce Center website at http://www.mnwfc.org.

5 Id.

6 ETA 5130 Benefit Appeals Report 2002 from the Minnesota Department of Employment and Economic Development: Labor Market Information Office.

7 295 Minn. 372, 204 N.W.2d 646 (1976).

8 412 N.W.2d 24 (Minn. 1987).

9 383 N.W. 443 (Minn. App. 1986), rev. denied (Minn. 05/22/86).

10 375 N.W.2d 553 (Minn. App. 1985).

11 Minn. Stat. ¤268.095, subd. 6, previously codified as Minn. Stat. ¤268.09, subd. 12 (1996).

12 590 N.W.2d 137 (Minn. App. 1999) rev denied (Minn. 04/20/99).

13 1998 wl 811470 (Minn. App. 1998) (unpublished).

14 See e.g. Kukkonen v. MDI Government Serv., 1998 wl 71507 (Minn. App. 02/16/99) (unpublished).

15 645 N.W.2d 144 (Minn. 2002).

16 Id. at 150.

17 644 N.W.2d 801 (Minn. 2002).

18 Id. at 806-07.

19 Peppi v. Phyllis Wheatley Community Center, 614 N.W.2d 750 (Minn. App. 2000).

20 2003 wl 827473 (Minn. App. 02/11/03) (unpublished).

21 Id. at *13-14.

22 2003 wl 289420 (Minn. App. 02/11/03) (unpublished).

23 2003 wl 449985 (Minn. App. 02/25/03) (unpublished).

24 2003 wl 943593 (Minn. App. 03/11/03) (unpublished).

25 665 N.W.2d 550 (Minn. App. 2003).

26 664 N.W.2d 16 (Minn. App. 2003).

27 2003 wl 1907951 (Minn. App. 04/22/03) (unpublished).

MARSHALL H. TANICK, a partner with Mansfield, Tanick & Cohen, PA, is an MSBA-certified civil trial specialist, and represents employers and employees in a variety of workplace-related matters.

BRIAN R. DOCKENDORF is an assistant attorney general with the Minnesota Attorney General's Office. He is a former assocate at Mansfield, Tanick & Cohen, PA.