Firing an Employee Suspected of Fraud in Minnesota

How does at-will employment apply when fraud is only suspected?

Minnesota’s at-will rule lets you discharge an employee without first proving fraud, unless a contract or a statute limits the decision. The Minnesota Supreme Court restated the rule in Dukowitz v. Hannon Security Services, 841 N.W.2d 147 (Minn. 2014): “In Minnesota, the employer-employee relationship is generally at-will, which means that an employer may discharge an employee for “any reason or no reason””.

Suspicion is therefore a lawful reason. The risk is that a thin fraud record leaves room for the employee to argue the real reason was an unlawful one. The Minnesota Human Rights Act provides that, “Except when based on a bona fide occupational qualification, it is an unfair employment practice for an employer, because of race, color, creed, religion, national origin, sex, gender identity, marital status, status with regard to public assistance, familial status, membership or activity in a local commission, disability, sexual orientation, or age,” to “discharge an employee” (Minn. Stat. § 363A.08, subd. 2), and it defines an employer as “a person who has one or more employees” (Minn. Stat. § 363A.03, subd. 16). A fraud reason that the evidence does not support is the kind of fact a discrimination claim is built on. So is a fraud reason you applied to one employee and not to another who did the same thing.

The other limit is your own paperwork. An employment contract, offer letter, or handbook that promises discharge only for cause or a set procedure can turn a quick firing into a breach-of-contract dispute; the document’s exact wording controls. The general at-will rules are covered in more detail in firing an at-will employee in Minnesota.

What makes a suspected-fraud firing look like retaliation?

A suspected-fraud firing looks like retaliation when the employee recently reported a legal violation or complained of discrimination, because Minnesota law bars discharge “because” of that activity. The Minnesota Whistleblower Act provides that an employer “shall not discharge, discipline, penalize, interfere with, threaten, restrain, coerce, or otherwise retaliate or discriminate against an employee” because “the employee, or a person acting on behalf of an employee, in good faith, reports a violation, suspected violation, or planned violation of any federal or state law or common law or rule adopted pursuant to law to an employer or to any governmental body or law enforcement official” (Minn. Stat. § 181.932, subd. 1). It reaches “any person having one or more employees in Minnesota” (Minn. Stat. § 181.931, subd. 3).

The risk is highest when an employee who flagged accounting irregularities then becomes the suspect in the same irregularities. The statute does not protect a report the employee knew was false: it “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). An employee who proves a violation may recover “any and all damages recoverable at law, together with costs and disbursements, including reasonable attorney’s fees” (Minn. Stat. § 181.935).

The Human Rights Act adds its own reprisal rule. It covers a person who “opposed a practice forbidden under this chapter or has filed a charge, testified, assisted, or participated in any manner in an investigation, proceeding, or hearing under this chapter,” and “A reprisal includes, but is not limited to, any form of intimidation, retaliation, or harassment” (Minn. Stat. § 363A.15). When either statute is in play, I suggest documenting the fraud evidence on its own terms, with dates that show what you knew and when, because the claim will turn on why you acted.

Why is the accusation riskier than the firing?

The accusation is riskier because defamation liability, unlike the discharge, depends on whether you had reasonable grounds for what you said. Minnesota gives employers a qualified privilege for statements about employee misconduct, but in Wirig v. Kinney Shoe Corp., 461 N.W.2d 374 (Minn. 1990), the Minnesota Supreme Court held that an employer that accused a cashier of theft without investigating had no privilege at all.

The privilege has three parts. In Lewis v. Equitable Life Assurance Society, 389 N.W.2d 876 (Minn. 1986), the Minnesota Supreme Court stated the rule: “[A] communication, to be privileged, must be made upon a proper occasion, from a proper motive, and must be based upon reasonable or probable cause.” Once the privilege applies, “The burden is on the plaintiff to show that the privilege has been abused,” and “the question of whether the privilege was abused is a jury question.”

Wirig shows where acting before confirmation breaks down. After an inventory audit showed losses, the new store manager accepted his assistant managers’ conclusion that three employees had stolen merchandise and fired them at an all-employee meeting. The court held “as a matter of law that Kinney had a proper purpose and arranged a proper occasion upon which to communicate its conclusions regarding suspected theft.” That was not enough: “The employer must also have reasonable or probable grounds for believing in the validity of the statement, even though hindsight might show the statement to be false.” The court reinstated the jury’s compensatory defamation award. It vacated the punitive award, finding that “Kinney’s failure to investigate constitutes gross negligence but not negligence rising to the level of willful indifference.” The same claim from the employee’s side is covered in wrongful termination and defamation claims.

What investigation steps give an employer reasonable grounds?

Reasonable grounds come from investigative steps, and the Minnesota Supreme Court has listed personal questioning of the accused employee among the steps present in its probable-cause cases. Reviewing its earlier cases, the Wirig court wrote: “In all cases where we have determined that probable cause existed, the evidence showed that investigative steps had been taken, including personal questioning of the affected employee, in an effort to ascertain the accuracy of statements made about the employee’s conduct.”

The court also described what does not count. An employer “who takes no steps to investigate but relies entirely on accusations either made by employees who may be biased or on secondhand hearsay with no identification of sources” lacks reasonable grounds. In Wirig, the main accuser was the coworker who had sexually harassed the cashier, and the other source repeated gossip without naming where it came from.

Bahr v. Boise Cascade Corp., 766 N.W.2d 910 (Minn. 2009) shows the other side. The court held that “statements made in the course of an employer’s investigation into employee misconduct are protected by the qualified privilege,” reasoning that “the employer has an important interest in protecting itself and the public against dishonest or otherwise harmful employees” (766 N.W.2d at 923). The court found the evidence insufficient to show malice by the employer. The employer had repeated the allegations only to employees who might have information, kept its questions within the allegations, interviewed the accused employee twice, and made its final discipline decision after hearing him. The court added that pointing to ways the employer “might have better conducted the investigation” did not show malice. Applied to suspected fraud, I suggest this order, because each step builds the record those cases look for:

1. The documents should come first: the ledger entries, invoices, expense reports, and system logs that show the transactions.
2. An interview of the employee should follow, with a request to explain each transaction and a written record of the answers.
3. Each source should be identified by name, with a note of any reason that source may be biased.
4. The allegation should reach only the people who can add facts or must act on them.
5. The decision should come after the employee has responded, with a written note of what it rests on.

A fuller process is laid out in the step-by-step guide to workplace investigations.

What investigation tools does Minnesota law rule out?

Minnesota bars honesty testing as an investigation tool: “No employer or agent thereof shall directly or indirectly solicit or require a polygraph, voice stress analysis, or any test purporting to test the honesty of any employee or prospective employee” (Minn. Stat. § 181.75, subd. 1). An employer or agent who knowingly administers such a test in violation of the statute “is guilty of a misdemeanor” (Minn. Stat. § 181.75, subd. 1), and an injured person may recover damages, “including costs of investigation and reasonable attorney’s fees” (Minn. Stat. § 181.75, subd. 4).

This is where Minnesota law differs from the federal rule. The federal Employee Polygraph Protection Act lets an employer request a polygraph only when several conditions are met, including that “the test is administered in connection with an ongoing investigation involving economic loss or injury to the employer’s business, such as theft, embezzlement, misappropriation” and that “the employer has a reasonable suspicion that the employee was involved in the incident or activity under investigation” (29 U.S.C. § 2006(d)). But that federal law “shall not preempt any provision of any State or local law … that prohibits lie detector tests or is more restrictive with respect to lie detector tests than any provision of this chapter” (29 U.S.C. § 2009). A Minnesota employer must follow the Minnesota ban.

An outside investigator’s report can bring a federal step of its own. A report to an employer about “suspected misconduct relating to employment” can fall outside the Fair Credit Reporting Act’s consumer-report rules if the statute’s conditions are met, and the first condition is that, “but for subsection (d)(2)(D), the communication would be a consumer report.” For a report in that class, “After taking any adverse action based in whole or in part on a communication described in paragraph (1), the employer shall disclose to the consumer a summary containing the nature and substance of the communication upon which the adverse action is based” (15 U.S.C. § 1681a(y)).

When does a suspension pending investigation make sense?

A suspension makes sense when the suspected employee still has access to money, accounts, or records and the facts are not yet in, because it removes that access without a final decision. It also gives you time for the interview and document review described above, which is what supports a later statement about the reason.

The unemployment insurance statute sets one limit on how long that can last without pay. Under Minn. Stat. § 268.095, subd. 5, “(b) A suspension from employment without pay that is of an indefinite duration or is for more than 30 calendar days is considered a discharge at the time the suspension begins.” An open-ended unpaid suspension is therefore treated as a firing for unemployment purposes on its first day. I suggest setting a defined end date and, if your investigation may run long, paying the employee during the suspension. The reason is that paragraph (b) reaches only a suspension without pay that is indefinite or longer than the stated period. For a salaried employee exempt from overtime, the federal salary-basis rule permits pay deductions “for unpaid disciplinary suspensions of one or more full days imposed in good faith for infractions of workplace conduct rules,” and “Such suspensions must be imposed pursuant to a written policy applicable to all employees” (29 C.F.R. § 541.602(b)(5)).

What final pay rules apply to an employee suspected of taking money?

Suspected fraud does not suspend Minnesota’s final pay statutes. When you discharge an employee, “the wages or commissions actually earned and unpaid at the time of the discharge are immediately due and payable upon demand of the employee” (Minn. Stat. § 181.13). The demand “must be in writing but need not state the precise amount,” and if the wages “are not paid within 24 hours after demand,” the employer is in default and the employee may collect “a penalty equal to the amount of the employee’s average daily earnings at the employee’s regular rate of pay or the rate required by law, whichever rate is greater, for each day up to 15 days, that the employer is in default.”

Minnesota gives one accommodation that fits fraud cases. Where the employee “was, during employment, entrusted with the collection, disbursement, or handling of money or property, the employer shall have ten calendar days after the termination of the employment to audit and adjust the accounts of the employee before the employee’s wages or commissions shall be paid,” and the penalty runs “only from the date of demand made after the expiration of the period allowed for payment” (Minn. Stat. § 181.14, subd. 4). If the employee resigns instead, wages are due “not later than the first regularly scheduled payday following the employee’s final day of employment, unless an employee is subject to a collective bargaining agreement with a different provision” (Minn. Stat. § 181.14, subd. 1); that scenario is covered in an employee who quits during a pending investigation. Late wages then follow subdivision 2: “Wages or commissions not paid within the required time period shall become immediately payable upon the demand of the employee” (Minn. Stat. § 181.14, subd. 2). If you and the employee disagree about how much is owed, a good-faith tender limits the exposure: where the employer “makes a legal tender of the amount which the employer in good faith claims to be due, the employer shall not be liable for any sum greater than the amount so tendered and interest thereon at the legal rate, unless” the employee recovers more in court (Minn. Stat. § 181.14, subd. 3).

The audit period is not a right to keep the missing money. An employer may not deduct 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” (Minn. Stat. § 181.79, subd. 1). Any authorization “shall set forth the amount to be deducted from the employee’s wages during each pay period,” a deduction “may not be in excess of the amount established by law as subject to garnishment or execution on wages,” and an agreement “contrary to this section shall be void.” The section “shall not apply” where “a contrary provision in a collective bargaining agreement exists” or 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.” The penalty for a wrongful deduction is “twice the amount of the deduction or credit taken” (Minn. Stat. § 181.79, subd. 2).

The timing rules are covered in Minnesota final pay rules, and deductions in unlawful deductions from final paychecks.

How should you state the reason for the termination?

I suggest stating the reason as what your investigation found, in words you can support with documents, because the words you choose decide how much protection you keep. Minnesota requires a written reason on request: an involuntarily terminated employee “may, within 15 working days following such termination, request in writing that the employer inform the employee of the reason for the termination. Within ten working days following receipt of such request, an employer shall inform the terminated employee in writing of the truthful reason for the termination” (Minn. Stat. § 181.933, subd. 1). That statement carries its own protection: “No communication of the statement furnished by the employer to the employee under subdivision 1 may be made the subject of any action for libel, slander, or defamation by the employee against the employer” (Minn. Stat. § 181.933, subd. 2).

What you say outside that written statement is not covered by subdivision 2. In Lewis, the Minnesota Supreme Court held that “the publication requirement may be satisfied where the plaintiff was compelled to publish a defamatory statement to a third person if it was foreseeable to the defendant that the plaintiff would be so compelled” (389 N.W.2d at 888). The same court held that “an employer’s communication to an employee of the reason for discharge may present a proper occasion upon which to recognize a qualified privilege” (id. at 890). In deciding what truth required, it noted that the company’s charges “went beyond accusations and were conclusory statements that plaintiffs had engaged in gross insubordination” (id. at 889). For a reason given before the fraud is confirmed, a factual description stays closer to what you can prove than a conclusion that the employee embezzled from the company. One example of a factual description is that the March deposits did not match the register reports, and the employee did not explain the difference.

References follow their own statute. That statute protects a private employer’s response to a reference request about “acts of violence, theft, harassment, or illegal conduct documented in the personnel record that resulted in disciplinary action or resignation and the employee’s written response, if any” (Minn. Stat. § 181.967, subd. 3, clause (5)). That protection holds unless the former employee proves by clear and convincing evidence that the information was false and defamatory. The former employee must also prove that the employer knew or should have known it was false and acted with malicious intent (Minn. Stat. § 181.967, subd. 2). “A disclosure under clause (5) must be in writing with a copy sent contemporaneously by regular mail to the employee’s last known address” (Minn. Stat. § 181.967, subd. 3), and the protection “does not apply to an action involving an alleged violation of chapter 363 or other statute” (Minn. Stat. § 181.967, subd. 6). More on this is in references after a disputed termination.

How do unemployment benefits and loss recovery work after the firing?

A discharged employee loses unemployment benefits only if the discharge was for employment misconduct or aggravated employment misconduct, and neither requires a criminal charge. The statute provides that an applicant “is ineligible for all unemployment benefits according to subdivision 10 only if” “the applicant was discharged because of employment misconduct as defined in subdivision 6,” or because of aggravated employment misconduct (Minn. Stat. § 268.095, subd. 4).

Employment misconduct “means any intentional, negligent, or indifferent conduct, on the job or off the job, that is a serious violation of the standards of behavior the employer has the right to reasonably expect of the employee,” and the list of conduct that is not misconduct includes “good faith errors in judgment if judgment was required” (Minn. Stat. § 268.095, subd. 6). Aggravated misconduct covers “any act, on the job or off the job, that would amount to a gross misdemeanor or felony” with “a significant adverse effect on the employment,” and “A criminal charge or conviction is not necessary to determine aggravated employment misconduct under this paragraph” (Minn. Stat. § 268.095, subd. 6a). Whatever the judge decides, “No findings of fact or decision or order issued by an unemployment law judge may be held conclusive or binding or used as evidence in any separate or subsequent action in any other forum, be it contractual, administrative, or judicial, except proceedings provided for under this chapter, regardless of whether the action involves the same or related parties or involves the same facts” (Minn. Stat. § 268.105, subd. 5a). The hearing itself is covered in contesting an unemployment claim.

Minnesota’s civil theft statute reaches a person who steals personal property: “A person who steals personal property from another is civilly liable to the owner of the property for its value when stolen plus punitive damages of either $50 or up to 100 percent of its value when stolen, whichever is greater” (Minn. Stat. § 604.14, subd. 1). “The filing of a criminal complaint, conviction, or guilty plea is not a prerequisite to liability under this section” (Minn. Stat. § 604.14, subd. 4), and you “may make a written demand for payment for the liability imposed by this section before beginning an action, including a copy of this section and a description of the liability contained in this section” (Minn. Stat. § 604.14, subd. 6). Minnesota’s coercion statute, Minn. Stat. § 609.27, subd. 1, lists among its threats “a threat to make or cause to be made a criminal charge, whether true or false.” Under that subdivision, a person who makes such a threat “and thereby causes another against the other’s will to do any act” is guilty of coercion. I suggest leaving any mention of a criminal charge out of a § 604.14 demand letter, because a payment made in response to that threat can make the demand coercion. Recovery from wages still runs through § 181.79’s written-authorization or judgment requirement.

Can You Fire an Employee Before Fraud Is Confirmed?

Firing before the fraud is confirmed is lawful for an at-will employee. The exposure comes from accusing without reasonable grounds, mishandling the final paycheck, using a banned honesty test, or acting in a way that ties the firing to a protected report. An investigation that questions the employee, names its sources, and limits who hears the allegation protects both the decision and what you say about it. If you are planning a termination for suspected fraud, email me at aaron@aaronhall.com with a brief description and the key dates. I can tell you whether your plan, your final pay handling, or a demand to the former employee raises any of the risks on this page. More on how employers handle these matters is on the Minnesota employment law page.