When a Minnesota city manager resigns, does the cash payout for unused accrued vacation count as 'salary' under the political subdivision salary cap (95% of the governor's salary)?

Plain-English summary

James Willis served as Plymouth's City Manager from May 1971 until his resignation in 1992. His May 1989 employment contract (formalized in a Letter of Understanding approved by Resolution 89-258) provided an annual base salary of $82,700, performance compensation, use of an automobile, a $450,000 universal life insurance policy paid by the city, business and professional expenses, and standard city employee benefits including accruing vacation leave. Paragraph 10 of the contract said Willis would be paid for all accrued vacation upon termination.

By the time Willis resigned, two issues had emerged. First, with the automobile and life insurance figured in, his compensation had exceeded the 95-percent-of-governor's-salary cap that Minn. Stat. § 43A.17, subd. 9 imposed on political subdivision employees by $25,000, and Willis had repaid that excess. Second, Willis had accumulated 42.6865 days of unused vacation, with a cash value of about $14,249.40, which the contract said the city would pay on termination.

Plymouth City Attorney Robert L. Meller, Jr. asked the AG: did the vacation payout also count as "salary" under § 43A.17? If yes, paying it would push Willis back over the cap. If no, the city could pay it.

The AG answered no. The cash equivalent of unused, accrued vacation paid on resignation is not "salary" for § 43A.17 cap purposes. The reasoning worked through three pieces of the statute:

(1) The § 43A.17, subd. 1 definition of "salary." Subd. 1 defined salary as "hourly, monthly, or annual rate of pay including any lump-sum payments and cost-of-living adjustment increases but excluding payments due to overtime worked, shift or equipment differentials, work out of class as required by collective bargaining agreements or plans established under Minn. Stat. § 43A.18, and back pay on reallocation or other payments related to the hours or conditions under which work is performed rather than the salary range or rate to which a class is assigned."

The vacation payout could arguably fit either side of that line: as a "lump-sum payment" included in salary, or as an "other payment related to the hours or conditions under which work is performed" excluded from salary. The AG read "lump-sum payment" as referring to performance or achievement payments, not to liquidation of accrued benefits on termination. Liquidation of unused vacation fell into the "other payments" category and was excluded from salary. The AG observed the closer analogy was that vacation liquidation was the equivalent of paying the employee at the regular salary rate for a period of days equal to the vacation accrued, after termination.

(2) The § 43A.02, subd. 38 definition of "total compensation." That subdivision defined "total compensation" as "salaries, cash payments and employee benefits including paid time off, group insurance benefits and other direct and indirect items of compensation with the exception of retirement plans." The structure of that definition treated salary as one component and employee benefits (including paid time off) as a separate component. The § 43A.17, subd. 9 cap was on salary only, not on total compensation.

(3) Section 43A.17, subd. 10 and the state-employee parallel in §§ 15A.081 and 15A.13. Subdivision 10 specifically forbade cities from providing vacation or sick leave benefits to elected officials as part of their compensation plans, while leaving cities free to provide such benefits to non-elected employees. Section 15A.081 placed salary caps on state agency heads but authorized transfer of vacation accrual between executive branch positions. Section 15A.13 expressly stated that annual salaries set under chapter 15A were "in addition to" other employment terms set by the Commissioner of Employee Relations under § 43A.18. Section 43A.17, subd. 8 prohibited the Commissioner from approving plans that allowed employees to convert unused vacation to cash before termination, but allowed conversion after termination, and the AG noted that state agency head compensation plans approved under § 43A.18 in fact allowed employees to convert unused, accrued vacation to cash upon termination.

Taken together, the AG concluded the § 43A.17, subd. 9 cap regulated salary, not total compensation, and did not capture termination-time vacation payouts. So Plymouth could pay Willis his $14,249.40 without violating the cap.

Currency note

This opinion was issued in 1993. Subsequent statutory amendments, court decisions, or later AG opinions may have changed the analysis. Treat this page as historical context, not current legal advice. Verify current law before relying on any specific rule, deadline, or remedy mentioned here.

Historical context: what the AG concluded

The opinion is a careful read of the political subdivision salary cap against a real fact pattern that pushed at its edges. Plymouth's contract with Willis bundled together several different forms of compensation: base salary, performance pay, automobile use, life insurance, ordinary employee benefits, and a contractual promise to cash out accrued vacation on termination. Some of those got pulled into the cap calculation (the automobile and life insurance, totaling about $25,000 in excess of the cap, which Willis repaid). Some did not (vacation payout).

The AG's analytical move was to use § 43A.02, subd. 38's "total compensation" framework as a baseline. That definition distinguished salary (one component) from paid time off and other benefits (separate components). Then the AG read § 43A.17, subd. 9 against that backdrop and concluded the cap operated only on the salary component.

The state-employee comparison reinforced the reading. The Commissioner of Employee Relations had authority under § 43A.18 to set terms and conditions of employment for state employees and to approve compensation plans. Section 43A.17, subd. 8 explicitly prohibited the Commissioner from approving compensation plans that let state employees convert vacation to cash before termination. By negative implication, the statute allowed post-termination conversion. State agency head compensation plans approved by the Commissioner in fact included post-termination vacation cash-out provisions. The Legislature had clearly contemplated that vacation cash-out at termination was a benefit feature, not a salary increase.

The footnote on contract interpretation was a careful disclaimer. The AG noted Op. Atty. Gen. 629a (May 9, 1975) declining to interpret contracts, and assumed without deciding that paragraph 10 of Willis's contract applied to his resignation circumstances.

Common questions

Q: Did the salary cap in § 43A.17 apply to a city manager generally?
A: Yes. Section 43A.17, subd. 9 capped salaries of "political subdivision employees" at 95% of the governor's salary, with limited exceptions. City managers were political subdivision employees.

Q: Why did Willis's car and life insurance count toward the cap but his vacation payout did not?
A: The opinion does not say in detail, but a plausible reading is that the city's payment of life insurance premiums and provision of automobile use were treated as imputed salary components (essentially in-kind salary) for the period they were provided, while accrued vacation was a recorded benefit liability that the city was paying out at termination, like paying a separation benefit. The opinion's logic was that vacation payout was the equivalent of paying the employee at the salary rate for the vacation days, after termination.

Q: Could the city have allowed Willis to cash out vacation while employed?
A: For state employees, § 43A.17, subd. 8 prohibited pre-termination cash conversion. For city employees, the opinion did not address it directly. Many cities had policies allowing limited pre-termination cash-out under specific conditions. Any such policy would have to live with the salary cap and any local rules.

Q: What if a city wanted to set a city manager's compensation that included a known vacation cash-out at retirement?
A: The AG's reading would let the city promise that benefit without including it in the salary cap calculation, as long as the cash-out was tied to termination. A pre-termination cash-out arrangement would have raised harder questions.

Q: Did the cap apply to the performance pay?
A: Yes, performance pay would be salary or close to it. The opinion noted the assumption that Willis's "salary, performance compensation, deferred compensation, if any, did not exceed the maximum salary," implying performance pay was counted.

Q: Did the AG's reading change between elected and non-elected officials?
A: Yes. Section 43A.17, subd. 10 forbade cities from providing vacation or sick leave benefits to elected officials as part of compensation. Non-elected employees like Willis could accrue vacation, cash it out at termination, and have that payout fall outside the salary cap.

Background and statutory framework

Minnesota's political subdivision salary cap lived in Minn. Stat. § 43A.17, subd. 9 (1992), which limited city, county, and other political subdivision employee salaries to 95 percent of the governor's salary. The cap was designed to prevent local officials from drawing pay that exceeded the governor's, on the rough policy view that the state's chief executive should be the highest-paid official in state government and its subdivisions.

The definition of "salary" lived in § 43A.17, subd. 1: hourly, monthly, or annual pay including lump-sum payments and cost-of-living adjustments, excluding overtime, shift differentials, work out of class, and other payments related to hours or conditions of work.

The "total compensation" framework lived in § 43A.02, subd. 38, which treated salary, cash payments, paid time off, group insurance, and other direct and indirect compensation as separate components.

Section 43A.17, subd. 10 set special rules for elected officials, including a prohibition on vacation or sick leave benefits in elected official compensation plans.

The state-employee parallel in chapter 15A authorized the Commissioner of Employee Relations under § 43A.18 to set total compensation terms, with the proviso under § 43A.17, subd. 8 that pre-termination vacation cash-out was prohibited.

Plymouth's contract followed a common city manager pattern: a Letter of Understanding setting base salary, performance compensation, vehicle use, insurance, business expenses, and standard employee benefits. The dispute over the cap reflected the structural tension between the elaborate compensation packages cities offered top managers and the simpler salary cap framework the Legislature had written.

Citations and references

Statutes:
- Minn. Stat. § 15A.081 (state agency head salaries)
- Minn. Stat. § 15A.13 (state salaries in addition to other employment terms)
- Minn. Stat. § 43A.02, subd. 38 (definition of "total compensation")
- Minn. Stat. § 43A.17, subd. 1 (definition of "salary")
- Minn. Stat. § 43A.17, subd. 8 (no pre-termination vacation cash-out for state employees)
- Minn. Stat. § 43A.17, subd. 9 (political subdivision salary cap, 95% of governor's salary)
- Minn. Stat. § 43A.17, subd. 10 (no vacation/sick leave in elected official compensation)
- Minn. Stat. § 43A.18 (Commissioner of Employee Relations authority over total compensation)

Other AG opinions referenced:
- Op. Atty. Gen. 629a, May 9, 1975 (declining to interpret contracts)

Source

• Landing page: https://www.ag.state.mn.us/Office/Opinions/
• Original PDF: https://www.ag.state.mn.us/Office/Opinions/469b-19930914.pdf

Original opinion text

Best-effort transcription from a scanned PDF. Minor errors may remain, the linked PDF is authoritative.

CITIES: OFFICERS: SALARIES: Compensation of employee for unused vacation upon termination is not considered salary for purposes of Minn. Stat. § 43A.17.

469b
(Cr. Ref. 59-a-41)
September 14, 1993

Robert L. Meller, Jr.
Plymouth City Attorney
Best & Flanagan
3500 IDS Center
80 South 8th Street
Minneapolis, MN 55402-2113

Dear Mr. Meller:

In your letter to Attorney General Hubert Humphrey III, you present substantially the following:

FACTS

James Willis was employed by the City of Plymouth as City Manager in May, 1971. On May 2, 1989, the City of Plymouth entered an employment contract the terms of which were set forth in a Letter of Understanding. This Letter of Understanding was approved by Resolution No. 89-258 dated May 1, 1989. Paragraph 2 of the contract provided as follows:

a. An annual salary at the rate of $82,700 per year for the year commencing May 1, 1989 through April 30, 1990, and thereafter at a rate as may from time-to-time be fixed by the City.
b. An annual performance compensation depending upon Mr. Willis' achievement of agreed-upon performance standards.

In addition, Paragraph 2 specifically provided that Mr. Willis' total compensation shall not exceed the amount allowed by Minnesota Statutes, Section 43A.17, subdivision 9. Paragraph 4 of the contract provided for the business and personal use of an automobile. Paragraph 5 provided that Mr. Willis would be entitled to participate in all benefit plans as the City may from time-to-time maintain for the benefit of its key management employees, including, but not necessarily limited to, PERA, FICA, deferred compensation, vacation, disability leave, holidays and insurance programs. The City's benefit plans specifically provided for the accrual of vacation leave benefits for regular full-time employees. The amount of vacation accrual depends upon the employee's length of service.

Paragraph 5 also provided Mr. Willis with a $450,000 universal life insurance policy for which the City paid the premiums. Paragraphs 6, 7, 8 also provided for the payment of professional travel, dues and subscriptions as well as one civic club membership at the City's expense. Paragraph 10 of the Contract specifically provided that Mr. Willis will be paid for all accrued vacation and other benefits for which he is eligible upon termination.

Mr. Willis resigned in 1992. At the time of his resignation, Mr. Willis was paid in excess of the maximum salary allowable under Minn. Stat. § 43A.17, subd. 9, which limits salaries of employees of political subdivisions to 95% of the governor's salary. The excess salary resulted from the City's providing Mr. Willis with the use of the automobile and a $450,000 universal life insurance policy. The amount of the excess salary, which was determined to be $25,000.00, has been repaid. In addition, at the time of his resignation, Mr. Willis had 42.6865 vacation days which had accrued and remained unused. The cash value of the unused, accrued vacation is approximately $14,249.40.

You then ask the following question:

QUESTION

Is the cash equivalent of the unused vacation days which accrued to the City Manager under the City's benefit plans part of the City Manager's salary for purposes of Minn. Stat. § 43A.17? If so, would the payment of the cash equivalent of the unused, accrued vacation to the City Manager after his resignation result in the violation of the salary limitations contained in Section 43A.17?

OPINION

In our opinion, the cash equivalent of the unused vacation days which accrued under the City's benefit plans is not part of the City Manager's salary for purposes of Minn. Stat. § 43A.17, subd. 9. As a result, payment to the City Manager of the cash equivalent of the unused, accrued vacation days after his resignation would not result in a violation of the salary limitations in that statute.

Minn. Stat. § 43A.17, subd. 9, prohibits the salary of a political subdivision's employee from exceeding 95 percent of the governor's salary except as otherwise provided in the section. By the express terms of this section, deferred compensation and payroll allocations to purchase an individual annuity contract for an employee are included in determining the salary. Subdivision 9 does not expressly address the question of whether the payment of the cash equivalent of unused, accrued vacation upon resignation is included in the determination of an employee's salary for the purposes of Subdivision 9's salary limitations.

The starting point for determining whether the cash equivalent of accrued, unused vacation is included in the salary of a political subdivision's employee is the definition of "salary" as set forth in Minn. Stat. § 43A.17, subd. 1. This subdivision provides, in pertinent part:

As used in subdivisions 1 to 9, "salary" means hourly, monthly, or annual rate of pay including any lump-sum payments and cost-of-living adjustment increases but excluding payments due to overtime worked, shift or equipment differentials, work out of class as required by collective bargaining agreements or plans established under Minn. Stat. § 43A.18, and back pay on reallocation or other payments related to the hours or conditions under which work is performed rather than the salary range or rate to which a class is assigned.

Under this definition, it might be argued that the payment of the cash equivalent of unused, accrued vacation could be considered a "lump-sum payment" which is included in the determination of salary. On the other hand, the payment of the cash equivalent of unused, accrued vacation could be considered "other payments related to the hours or conditions under which work is performed rather than the salary range or rate to which a class is assigned," which are not included in the determination of salary. Although somewhat ambiguous, we believe the term "lump-sum payment" as used in this statutory definition refers to payments made to recognize achievement or performance, and not those payments made upon employee termination in liquidation of an employee benefit, such as accrued vacation. Rather, liquidation of unused, accrued vacation would fall into the "other payments" category and would not be included as an addition to salary for purposes of Minn. Stat. § 43A.17, subd. 9. If anything, liquidation of unused, accrued vacation would seem most closely analogous to the employee being paid at the regular salary rate for a period, after termination, equal to the vacation days accrued.

This interpretation is supported by the definition of "total compensation" set forth in Minn. Stat. § 43A.02, subd. 38. Minn. Stat. § 43A.02, subd. 38, defines total compensation as "salaries, cash payments and employee benefits including paid time off, group insurance benefits and other direct and indirect items of compensation with the exception of retirement plans." This definition of total compensation clearly makes a distinction between salary, which is but one component of total compensation, and employee benefits, like vacation, which is another component. The express limitation in Minn. Stat. § 43A.17, subd. 9, is on salary and not on total compensation.

Minn. Stat. § 43A.17, subd. 10, also lends support to this interpretation. This section places restrictions on what may be included in the compensation plans for a city's elected officials and specifically prohibits a city from providing vacation or sick leave benefits to elected officials as part of the official's compensation plan. This section supports a conclusion then that salary is but one component of a city employee's total compensation. While, under the provisions of Subdivision 10, a city may not provide sick or vacation leave benefits to an elected official as part of a compensation plan, it does not restrict the city's authority to provide sick or vacation leave benefits to other, non-elected officials and employees.

The provisions of Minn. Stat. § 15A.081 and 15A.13 further support a conclusion that the limitations on salary in Minn. Stat. § 43A.17, subd. 9, were not intended to limit total compensation and to prevent a city from providing employee benefits to its employees and it liquidate unused, accrued benefits upon termination. First, Minn. Stat. § 15A.081 places limitations on the salaries of state agency heads. Subdivision 9 of that section, however, expressly authorizes the transfer of vacation accrual between and among executive branch positions. In addition, Minn. Stat. § 15A.13 expressly provides that the annual salaries prescribed by Minn. Stat. ch. 15A are in addition to other terms and conditions of employment established by the Commissioner of Employee Relations pursuant to Minn. Stat. § 43A.18. This latter section establishes the Commissioner's authority to determine the total compensation, including salary and benefits, of State employees. Although the Commissioner is prohibited under the express provisions of Minn. Stat. § 43A.17, subd. 8, from establishing or approving any compensation which allows an employee to convert unused accrued vacation in cash before termination from State employment, the Commissioner has the authority to approve compensation plans which allow an employee to convert unused, accrued vacation into cash after termination. In fact, the compensation plans for state agency heads which are approved by the Commissioner of Employee Relations pursuant to Minn. Stat. § 43A.18 expressly allow such employees to convert their unused, accrued vacation into cash upon termination from State employment.

When considered in the context of the provisions of ch. 43A and ch. 15A discussed above, it is our conclusion that the limitations on the salary of a city's employee contained in Minn. Stat. § 43A.17, subd. 9, do not apply to the cash equivalent of the City Manager's unused, accrued vacation and that payment of the cash equivalent upon the employee's resignation would not violate the limitations on salary contained in Minn. Stat. § 43A.17, subd. 9.

Very truly yours,

HUBERT H. HUMPHREY III
Attorney General

SHARON LEWIS
Assistant Attorney General
(612) 297-5945