Can an Employer Countersue an Employee Who Sues?

What counts as a counterclaim when an employee sues?

A counterclaim is your company’s own claim against the employee, filed with your answer to the employee’s lawsuit. It is not a defense: a defense argues the employee should lose, while a counterclaim asks the court to award your company something, and it can ask for more than the employee is seeking.

Minn. R. Civ. P. 13.03 says a counterclaim “may or may not diminish or defeat the recovery sought by the opposing party. It may claim relief exceeding in amount or different in kind from that sought in the pleading of the opposing party.” That means an employer facing a wage or discrimination claim can ask for money damages, the return of property, or an order stopping the use of confidential information.

The claim does not have to be related to the employee’s lawsuit. Under Minn. R. Civ. P. 13.02, “A pleading may state as a counterclaim any claim against an opposing party not arising out of the transaction that is the subject matter of the opposing party’s claim.” Those unrelated claims are optional. The claims that arise out of the transaction behind the employee’s lawsuit are the ones the rules can force into the case, covered in the next section.

When does Minnesota require the counterclaim in your answer?

Minnesota requires a counterclaim in your answer when it is a non-tort claim, such as breach of contract, that already exists and arises out of the same transaction as the employee’s lawsuit. Tort claims, such as defamation, are never compulsory in Minnesota state court, even when they grow out of the same facts.

The rule is Minn. R. Civ. P. 13.01: “A pleading shall state as a counterclaim any claim which at the time of serving the pleading the pleader has against any opposing party, if it arises out of the transaction that is the subject matter of the opposing party’s claim and does not require for its adjudication the presence of third parties over whom the court cannot acquire jurisdiction,” and a claim that is already the subject of another pending case is excused. A compulsory contract claim left out of the answer can be lost for good.

The Minnesota rule leaves out a word the federal rule uses. In House v. Hanson, 72 N.W.2d 874 (Minn. 1955), the Minnesota Supreme Court held that “transaction” in Rule 13.01 “does not embrace claims in tort,” because the drafters dropped “occurrence” to keep tort counterclaims optional. The Minnesota Court of Appeals applied that holding to an executive director’s later lawsuit against her former employer in Leiendecker v. Asian Women United of Minnesota, 731 N.W.2d 836 (Minn. App. 2007), holding that “the Minnesota version of rule 13.01 provides a blanket exclusion for tort counterclaims.” The same court held that a counterclaim is compulsory “only if the claim is ripe,” and it left open whether the doctrine of res judicata, which bars relitigating a decided claim, could still apply on remand.

A federal court is different. Fed. R. Civ. P. 13(a) makes a counterclaim compulsory if it “arises out of the transaction or occurrence that is the subject matter of the opposing party’s claim,” so a tort claim tied to the same facts may have to be raised there.

How do you defend against the employee’s claims while you counterclaim?

Your defense and your counterclaim go in the same answer, so the work on both starts the day the summons arrives. Under Minn. R. Civ. P. 12.01, a “Defendant shall serve an answer within 21 days after service of the summons upon that defendant unless the court directs otherwise,” and the same rule gives the employee 21 days to “serve a reply to a counterclaim in the answer.”

Within that window, I suggest five steps, because each one either answers the employee’s claims or decides whether a counterclaim is worth filing:

• Preserve the records. Stop routine deletion of the employee’s email, files, and device data, and collect the personnel file, pay records, and policies that applied.
• Investigate the facts. Interview the managers who made the decisions the employee challenges, and write down what each one knew and when.
• Test each claim against the evidence. List what the employee must prove for each claim and check your documents against each item; the gaps in the employee’s proof are your defense.
• Build one consistent account. The reason you give for a decision in the answer should match the reason in the termination notice, the reasons managers gave at the time, and what your witnesses will say later. A reason that shifts over the case is evidence the employee will use.
• Find your own mistakes early. A missed final paycheck or an undocumented decision is better fixed or settled now than discovered in discovery, and it bears on whether a counterclaim invites more scrutiny than it is worth.

Can a counterclaim be filed against multiple plaintiffs at the same time?

Yes. When several employees sue your company together, each one is an opposing party, and Minn. R. Civ. P. 13.01 reaches a claim the pleader has “against any opposing party.” Your answer can state a counterclaim against each plaintiff, and against several plaintiffs in a single count when the facts are shared, such as two employees who left together with the same customer list. Under Rule 13.08, “Persons other than those made parties to the original action may be made parties to a counterclaim or cross-claim in accordance with the provisions of Rules 19 and 20,” so a competitor or new employer that received the information can be added to your counterclaim when those joinder rules allow it.

Suing several employees together does not make each one answerable for everything. For a fault-based claim, Minn. Stat. § 604.02, subd. 1 provides that “When two or more persons are severally liable, contributions to awards shall be in proportion to the percentage of fault attributable to each,” except that “a person whose fault is greater than 50 percent,” “two or more persons who act in a common scheme or plan that results in injury,” and “a person who commits an intentional tort” are “jointly and severally liable for the whole award.” Joint and several liability means you can collect the whole award from any one of them. The statute “applies to claims arising from events that occur on or after August 1, 2003.” Evidence that the employees coordinated their conduct therefore matters to how much you can collect from each.

What claims do Minnesota employers bring against employees?

The counterclaims employers bring most often are breach of a written agreement, breach of the employee’s duty of loyalty, and trade secret misappropriation. Each one needs its own evidence, independent of whatever the employee claims.

• Breach of contract. Confidentiality agreements, return-of-property clauses, and repayment terms for loans, advances, or training costs are contract claims. Because they are not torts, a contract claim that arises out of the transaction that is the subject matter of the employee’s claim is the kind Rule 13.01 can make compulsory. A training-cost term has a statutory limit: under Minn. Stat. § 181.645, an employer “may not require an employee or prospective employee to pay for the expenses of training or testing that is required by federal or state law or is required by the employer for the employee to maintain the employee’s current position, unless the training or testing is required to obtain or maintain a license, registration, or certification for the employee or prospective employee.”
• Duty of loyalty. In Rehabilitation Specialists, Inc. v. Koering, 404 N.W.2d 301 (Minn. App. 1987), an employer’s suit against a former administrator who started a competing business, the court stated that “An employee’s duty of loyalty prohibits her from soliciting the employer’s customers for herself, or from otherwise competing with her employer, while she is employed.” The same court recognized that an employee “has the right, therefore, while still employed, to prepare to enter into competition with her employer,” and treated the line between the two as a fact question; it reversed summary judgment for the employee and sent the case to trial. More on an employee’s duty of loyalty while still employed.
• Trade secrets. Under the Minnesota Uniform Trade Secrets Act (“MUTSA”), information is a trade secret only if, among other things, it “is the subject of efforts that are reasonable under the circumstances to maintain its secrecy.” Minn. Stat. § 325C.01, subd. 5. The federal Defend Trade Secrets Act (“DTSA”) adds a parallel claim when the secret “is related to a product or service used in, or intended for use in, interstate or foreign commerce.” 18 U.S.C. § 1836(b)(1). If the dispute started when a former employee took data or trade secrets, your secrecy measures before the departure are the first thing the court will examine.

A noncompete claim is narrower than it was before 2023; the question below on noncompetes covers it.

How does a counterclaim work against an employee’s wage claim?

When an employee sues for unpaid wages and your company believes the employee owes it money, the counterclaim is the lawful way to collect. Minnesota bars you from simply keeping the money out of wages unless the employee consents in writing after the loss or a court holds the employee liable.

Minn. Stat. § 181.79, subd. 1 bars any deduction from wages “for lost or stolen property, damage to property, or to recover any other claimed indebtedness running from employee to employer, unless the employee, after the loss has occurred or the claimed indebtedness has arisen, voluntarily authorizes the employer in writing to make the deduction or unless the employee is held liable in a court of competent jurisdiction for the loss or indebtedness.” A counterclaim asks the court for exactly that holding. The same subdivision limits a consented deduction: “Any authorization for a deduction shall set forth the amount to be deducted from the employee’s wages during each pay period,” and “A deduction may not be in excess of the amount established by law as subject to garnishment or execution on wages.” Under Minn. Stat. § 181.79, subd. 1(c), the section does not apply “in cases where a contrary provision in a collective bargaining agreement exists” or “in cases where an employee, prior to making a purchase or loan from the employer, voluntarily authorizes in writing that the cost of the purchase or loan shall be deducted from the employee’s wages, at regular intervals or upon termination of employment.” An employer that deducts first is “liable in a civil action brought by the employee for twice the amount of the deduction or credit taken” under subdivision 2, which can turn your offset into a new claim against you. A final paycheck is also subject to the final-pay rules in Minn. Stat. § 181.13 (discharge) and Minn. Stat. § 181.14, subd. 1 (resignation).

Two other wage statutes raise the stakes. If the employee wins a wage claim under Minn. Stat. § 181.171, subd. 3, the court “shall order an employer who is found to have committed a violation to pay to the aggrieved party reasonable costs, disbursements, witness fees, and attorney fees,” whatever happens on your counterclaim. And Minn. Stat. § 181.03, subd. 6 bars retaliating against an employee “for asserting rights or remedies” under the wage laws, with “a civil penalty of not less than $700 nor more than $3,000 per violation.”

When does a counterclaim become a retaliation claim?

A counterclaim raises a retaliation question when the employee argues it was filed because the employee complained, reported a violation, or sued. The Minnesota statutes below do not name counterclaims, so the answer turns on each statute’s own words, and those words differ.

• Minnesota Human Rights Act (“MHRA”). Minn. Stat. § 363A.15 makes it unlawful “to intentionally engage in any reprisal against any person because that person” opposed discrimination or “has filed a charge, testified, assisted, or participated in any manner in an investigation, proceeding, or hearing under this chapter.” It adds: “A reprisal includes, but is not limited to, any form of intimidation, retaliation, or harassment.”
• Minnesota Whistleblower Act. Minn. Stat. § 181.932, subd. 1 bars an employer from acting to “discharge, discipline, penalize, interfere with, threaten, restrain, coerce, or otherwise retaliate or discriminate against an employee regarding the employee’s compensation, terms, conditions, location, or privileges of employment” because of a good-faith report of a violation of law. The act’s definitions section, Minn. Stat. § 181.931, subd. 5, defines “penalize” as “conduct that might dissuade a reasonable employee from making or supporting a report, including post-termination conduct by an employer or conduct by an employer for the benefit of a third party.” In Leiendecker v. Asian Women United of Minnesota, 731 N.W.2d 836 (Minn. App. 2007), applying the 2006 text of the act (“discharge, discipline, threaten, otherwise discriminate against, or penalize”), the Court of Appeals held that a whistleblower claim ripened when the employee suffered an adverse employment action that effected a “material change in the terms or conditions of her employment.” Under Minn. Stat. § 181.935, the employee may recover “any and all damages recoverable at law, together with costs and disbursements, including reasonable attorney’s fees.” More on Minnesota’s whistleblower retaliation statute.
• Wage laws. Minn. Stat. § 181.03, subd. 6, covered above, and the federal Fair Labor Standards Act, which bars retaliation against an employee who “has filed any complaint or instituted or caused to be instituted any proceeding” under it. 29 U.S.C. § 215(a)(3).

Title VII, the federal discrimination statute, has its own retaliation standard. Interpreting Title VII’s retaliation section, 42 U.S.C. § 2000e-3(a), the U.S. Supreme Court held in Burlington Northern & Santa Fe Railway Co. v. White, 548 U.S. 53 (2006) that the provision is not limited to actions “related to employment or occur at the workplace,” and covers actions “harmful to the point that they could well dissuade a reasonable worker from making or supporting a charge of discrimination.” In that opinion, the Court described its earlier labor-law decision as covering “the retaliatory filing of a lawsuit against an employee.” That standard governs Title VII claims; the 2007 Minnesota decision above applied the material-change test to the Whistleblower Act as it read in 2006.

For a broader look at retaliatory countersuits, see the companion page.

When does a defamation counterclaim over an employee’s complaint fail?

A defamation counterclaim built on what the employee said in the lawsuit or in testimony can run into an absolute privilege for relevant statements made at a judicial or quasi-judicial proceeding. A counterclaim built on those statements or on an agency charge can also face a 2024 statute that lets the employee seek early dismissal and recover attorney fees if the motion succeeds.

In Mahoney & Hagberg v. Newgard, 729 N.W.2d 302 (Minn. 2007), a law firm sued its former secretary over an affidavit she gave in another lawsuit, and the Minnesota Supreme Court affirmed dismissal. Under the court’s test, a statement is privileged if it is “(1) made by a judge, judicial officer, attorney, or witness; (2) made at a judicial or quasi-judicial proceeding; and (3) the statement at issue is relevant to the subject matter of the litigation.” When the privilege applies, “the speaker is completely shielded from liability for her statements, even statements that are intentionally false or made with malice.” The court applied it to the firm’s breach-of-confidence, privacy, and conspiracy claims because they were, in substance, defamation claims. The court also said the privilege “is not designed to provide blanket protection for any statement made within the course of litigation,” so a statement unrelated to the case is measured on its own facts.

The Uniform Public Expression Protection Act applies to a claim “based on the person’s” “communication in a legislative, executive, judicial, administrative, or other governmental proceeding.” Minn. Stat. § 554.08. Its special motion reaches a “counterclaim” by name under Minn. Stat. § 554.09. Under Minn. Stat. § 554.13, once the employee establishes that the act applies and your company fails to establish that it does not, the court “shall dismiss with prejudice” the counterclaim in either of two situations. One is that your company “fails to establish a prima facie case as to each essential element of the cause of action.” The other is that the employee establishes that your company “failed to state a cause of action upon which relief can be granted” or that “there is no genuine issue as to any material fact and the moving party is entitled to judgment as a matter of law.” Minn. Stat. § 554.16 requires an award of “court costs, reasonable attorney fees, and reasonable litigation expenses related to the motion” to the employee who wins it. The act does not apply to a claim brought under federal law. More on Minnesota’s anti-SLAPP statute.

One limit runs the other way. The Whistleblower Act “does not permit an employee to make statements or disclosures knowing that they are false or that they are in reckless disregard of the truth.” Minn. Stat. § 181.932, subd. 3. That removes the act’s retaliation protection for a knowingly false report, but it does not remove the litigation privilege for statements the employee makes in the case.

What does a weak counterclaim cost the employer?

A counterclaim without solid facts can cost your company its own attorney fees, sanctions, a fee award to the employee, and sometimes a later lawsuit. The person signing it certifies that it is not filed for an improper purpose and that its facts have evidentiary support.

Minn. R. Civ. P. 11.02 and Minn. Stat. § 549.211, subd. 2 each require a certification, “formed after an inquiry reasonable under the circumstances,” that a filing “is not being presented for any improper purpose, such as to harass or to cause unnecessary delay or needless increase in the cost of litigation,” and Rule 11.02 requires that factual contentions “have evidentiary support or, if specifically so identified, are likely to have evidentiary support after a reasonable opportunity for further investigation or discovery.” Under subdivision 3, the court may, “after notice and a reasonable opportunity to respond,” sanction “the attorneys, law firms, or parties,” and subdivision 5 says a sanction “must be limited to what is sufficient to deter repetition of the conduct or comparable conduct by others similarly situated.” Within that limit, the sanction may include, “if imposed on motion and warranted for effective deterrence, an order directing payment to the movant of some or all of the reasonable attorney fees and other expenses incurred as a direct result of the violation.” More on sanctions for frivolous claims.

Trade secret claims carry their own fee risk. Minn. Stat. § 325C.04 lets the court award reasonable attorney’s fees to the prevailing party when “a claim of misappropriation is made in bad faith” or “a motion to terminate an injunction is made or resisted in bad faith” (and, in the employer’s favor, when “willful and malicious misappropriation exists”), and 18 U.S.C. § 1836(b)(3)(D) does the same under federal law. Federal law also says an individual “shall not be held criminally or civilly liable under any Federal or State trade secret law” for a disclosure made in confidence to a government official or an attorney solely to report or investigate a suspected violation of law, or made under seal in a court filing. 18 U.S.C. § 1833(b)(1).

The dispute can also continue after the case ends. In the litigation between a Minnesota nonprofit and its former executive director, the fifth lawsuit between them was the former director’s claim that the organization had committed torts by suing earlier, including its suit against the director for conversion. Ruling on the procedure under Minnesota’s earlier anti-SLAPP law, the Minnesota Supreme Court described the only independently actionable claim left as “the one for malicious prosecution.” Leiendecker v. Asian Women United of Minnesota, 848 N.W.2d 224 (Minn. 2014).

An evaluation of a counterclaim for damages should start with the employer’s proof of what it actually lost, because that proof is what discovery tests.

How do counterclaims change the settlement of an employee’s lawsuit?

A counterclaim gives both sides something to release, so most settlements of a case with counterclaims are mutual releases. Minnesota law sets different signing rules for a release that settles a filed claim than for an ordinary severance release. Federal law does the same only for a waiver “in settlement of a charge filed with the Equal Employment Opportunity Commission, or an action filed in court” alleging age discrimination.

Under Minn. Stat. § 363A.31, subd. 2, a release of MHRA claims “may be rescinded within 15 calendar days of its execution, except that a waiver or release given in settlement of a claim filed with the department or with another administrative agency or judicial body is valid and final upon execution.” A release that settles the employee’s pending lawsuit therefore takes effect when it is signed, while a release signed before any claim was filed carries the rescission right.

If the employee’s lawsuit alleges age discrimination, the Older Workers Benefit Protection Act’s settlement rule applies. A release settling an age claim filed in court is not knowing and voluntary unless, at a minimum, it meets the act’s basic requirements (a written agreement the employee can understand, a specific reference to age claims, no waiver of future claims, payment beyond what the employee is already owed, and written advice to consult an attorney), and “the individual is given a reasonable period of time within which to consider the settlement agreement.” 29 U.S.C. § 626(f)(2). A release of age claims that does not settle an age-discrimination charge or lawsuit, such as a mutual general release settling a wage or contract lawsuit, falls under 29 U.S.C. § 626(f)(1): “Except as provided in paragraph (2), a waiver may not be considered knowing and voluntary unless at a minimum” it meets that paragraph’s listed requirements, among them that “the individual is given a period of at least 21 days within which to consider the agreement” and “the agreement provides that for a period of at least 7 days following the execution of such agreement, the individual may revoke the agreement.” More on Minnesota release drafting rules.

How can an employer minimize liability exposure before a dispute?

Most of what decides an employment case, on the employee’s claims and on your counterclaim, is created before anyone sues. I suggest putting these in place now, because each one either lowers the chance of a claim or gives a later counterclaim the evidence it needs:

• Written policies that match practice. A handbook covering pay, discipline, reporting complaints, and the return of company property helps only if managers follow it. A policy you do not enforce can become evidence against you.
• Signed agreements. Confidentiality, return-of-property, and repayment terms should be in a signed agreement, because those are the contract counterclaims described above. For a loan or advance, get the employee’s written authorization to deduct the cost from wages before the loan is made; that is one of the Minn. Stat. § 181.79 exceptions covered in the wage-claim section. A confidentiality agreement should also carry the federal whistleblower-immunity notice covered in the trade secret question below.
• Documentation at the time. Performance reviews, written warnings, and a short note of the reason for each significant decision, written when the decision is made, are far more persuasive than an account reconstructed after the lawsuit arrives.
• Secrecy measures. Limit access to confidential information, mark it, and recover devices and accounts at departure, because the trade secret definition in Minn. Stat. § 325C.01, subd. 5 requires reasonable efforts to keep the information secret.
• Insurance and indemnity. Employment practices liability insurance can pay defense costs and settlements of employee claims. Read what the policy excludes and how it treats a counterclaim you choose to file, and notify the carrier as soon as a claim arrives. If you use a staffing agency or professional employer organization, read the indemnity terms in that contract before a dispute begins.
• Regular review. Revisit policies and agreements each year, since Minnesota employment statutes change often; the 2023 noncompete ban covered below is one example.

A counterclaim is often the right response when an employee’s lawsuit leaves your company with a real loss: a broken agreement, money owed, or confidential information that walked out the door. In Minnesota state court, contract claims that arise out of the transaction behind the employee’s lawsuit belong in your answer. Tort claims are not compulsory under Rule 13.01, though Leiendecker (2007) left open whether res judicata could still reach an omitted claim. A counterclaim filed mainly to pressure the employee can backfire: it can support a retaliation argument, the litigation privilege or the 2024 public-expression statute can defeat it, and a fee award can follow. If you would like a second set of eyes on a planned counterclaim, email Aaron Hall at aaron@aaronhall.com with a brief description. I start an intake and conflict check before you send confidential documents, such as the employee’s complaint. More on defending employment claims is on my employment law page.