To Avoid Liability, Make Only Prospective Pay, Benefits Changes

In Wisconsin, employment is presumed to be at-will. Accordingly, you have broad discretion to modify your employees’ terms of employment, including their compensation and benefit plans. It isn’t always clear, however, when the modifications should go into effect and to which wages and benefits they should apply. Selecting the correct effective date is critical to avoid a dispute and potential litigation.

Prospective vs. Retroactive Modifications

Under the at-will arrangement, with limited exceptions, you can terminate an employee’s employment at any time and for any reason so long as it isn’t an illegal one, such as discrimination based on the individual’s membership in a protected class. To deviate from the at-will presumption, Wisconsin employers typically use a contract or similar agreement listing a fixed term of employment.

While you have broad, unilateral discretion to modify the terms of employment in an at-will relationship, there are limits. If you modify an at-will employee’s compensation or benefit plan, the change can be applied only prospectively to wages and benefits earned after the date of the alteration. If you retroactively apply the modifications to wages and benefits already earned, you’ll be exposed to potential liability.

Milwaukee case. A 2005 Wisconsin Court of Appeals ruling illustrates the foregoing principles. In the case, a group of nonunion salaried management employees from Milwaukee County claimed the employer was liable for damages related to the amendment of an ordinance governing the use of nonunion employees’ accrued sick allowance at the time of retirement. The ordinance was amended on November 2, 2000 (with an effective date of January 1, 2001), and the amendment provided nonunion employees with more generous benefits related to accrued sick time. The ordinance was subsequently amended, however, to revoke the generous benefits on February 21, 2002 (with an effective date of March 15, 2002).

The appeals court was asked to decide “whether the ability to be paid for all accrued sick allowance already earned is a benefit that could be taken away on March 15, 2002, after the employees had performed work while the promise was in effect, or whether that benefit attached itself to all hours accrued as of March 14, 2002.” The court decided the nonunion employees were entitled to retain the benefit of unlimited payout of sick allowance that accrued before the amended ordinance went into effect. The court reasoned that if they performed work in reliance on a contract or unilateral promise, allowing the contract or pledge to be revoked retroactively “would be unjust and inequitable.” Champine v. Milwaukee County.

Illinois case. In reaching that conclusion, the Wisconsin court relied on a 1984 Illinois Court of Appeals decision. In that case, at-will employees challenged their employer’s decision to change its severance pay policy. The court concluded any severance pay that arose and vested while the former policy was in place survived the modification. Any accrual of severance pay after the policy was amended would be subject to the amended policy.

In rendering its decision, the Illinois court was careful not to go too far. It emphasized that at-will employers still have the right to modify payment provisions, with the caveat that any such modifications could be applied only prospectively for wages and benefits accrued after the relevant changes. Kulins v. Malco, Microdot Co.

The Wisconsin court relied on the same reasoning in Champine to conclude that employees who didn’t retire before March 15, 2002, could collect a payout upon retirement consistent with the terms of the old ordinance if the accrued time hadn’t been used before their departure.

Bottom Line

Wisconsin’s rule that any changes to at-will employees’ compensation and benefit plans can be applied only prospectively is rooted in public policy considerations and the principle of fundamental fairness. If employees have relied on a promise they would be paid a definite amount or receive certain benefits, you can’t revoke the wages and benefits after they’ve completed the work.

While the case law and reasoning may seem straightforward, amending your policies, particularly those related to compensation and benefit plans, is a labor-intensive task that can create confusion. When implementing any changes, work closely with your HR department to ensure they are properly applied. Retain all pertinent documentation in case a dispute arises after the modifications go into effect.

This article, slightly modified to note recent updates, was featured in the September 2019 issue of the Wisconsin Employment Law Letter, which is co-edited by Axley Brynelson Attorneys Saul Glazer and Michael Modl and published by BLR®—Business & Legal Resources. Reproduced here with the permission of BLR®—Business & Legal Resources.