Back to the July-August 2023 issue

Compensating Employees on Workers’ Comp Leave

By Joyce Hottinger and Lisa Sova

Issues surrounding wages and benefits for an employee who is on leave due to a work-related injury can be complex. Following are three options to address the legal requirements and typical city practices when compensating employees on workers’ compensation (WC) leave. City policy or union contracts may dictate the practice a city takes.

Payment of wages options

Option 1: Do nothing and wait for the city’s WC carrier to process the claim. Of the three options, this may be the easiest approach in handling work-related injuries from a payroll perspective. However, there is a potential downside of financial hardship to the employee who is waiting for the claim to be processed. Additionally, depending on the circumstances, the claim could be denied and then the city would need to issue back pay (assuming the employee used accrued sick time, vacation, paid time off, or compensatory during the leave).

Option 2: Allow an employee to use leave to cover the absence while the city’s WC carrier processes the claim. This option avoids financial hardship for the employee while waiting for the claim to be processed. If the claim is denied, no back pay is owed as the employee has been using their accumulated leave hours to cover the absence. However, if the claim is approved, the employee has in effect been overpaid and adjustments are necessary.

The specifics of how the city goes about correcting this overpayment will depend on the applicable payroll system. Any paid time off used to cover hours now compensated through WC needs to be repaid. This can be done one of two ways:

  • If the employee is back to work, this can be as simple as reducing the hours the city pays the employee for work performed and adding those hours back to the employee’s leave balance(s) account to offset hours paid by WC insurance.
  • If the employee isn’t back to work, or their imminent return to work is unlikely, then the employee needs to issue a personal check to the city in the amount received from WC for hours paid from the employee’s leave. Because WC benefits are not taxable and ineligible wages for Public Employees Retirement Association (PERA), the city will need to correct this in their payroll system.

Another potential complexity with this option arises if the employee uses accumulated leave to cover the WC leave in one calendar year, and then the WC claim is paid in the following calendar year. In this scenario, corrections are made in the year the claim is paid. However, this can prove difficult if the employee isn’t returning to work and has no taxable earnings to be offset by the WC payment.

Option 3: Allow an employee to use accrued leave to supplement the WC payment, up to one-third of their average gross wages at the time of injury. Minnesota WC law allows a city to provide payment of additional benefits to employees receiving WC benefits. However, the total of the WC payment and any additional payment cannot be greater than the employee’s average gross weekly wage at the time of the injury. WC “lost wages” benefits are paid at two-thirds the employee’s regular gross average wages on the date of injury, so that leaves one-third of the employee’s regular gross average wage available to be paid, and can be taken from accumulated sick leave, vacation, personal time off, compensatory time, or not charged to any leave category at all but just simply paid by the city. While cities are not required to follow this practice, once implemented it will remain until the policy or contract is changed.

One downside to this option is it provides a disincentive for employees to return to work as compensation may exceed employees’ typical net pay.

Payment of benefits

The WC law does not require cities to continue contributions toward health insurance while an employee is on WC. However, if the WC injury qualifies under the Family and Medical Leave Act (FMLA), the city must continue contributing toward group health benefits during FMLA (up to 12 weeks).

If the city’s policy is to continue contributing to insurance benefits for employees out on other types of unpaid leave, it should do so for employees out on WC leave. Otherwise, the city may be open to discrimination claims under WC law.

Joyce Hottinger is assistant human resources director with the League of Minnesota Cities. Contact: or (651) 281-1216. Lisa Sova is assistant finance director with the League of Minnesota Cities. Contact: or (651) 281-1208.