atLaw
In these challenging economic times, employers are making tough financial choices. Companies may find themselves prioritizing payments owed to third parties, paying the “squeaky wheel” first. However, thinking that payments owed to employees are less pressing is a mistake. The number of lawsuits arising under the Massachusetts Wage Act has spiked in the last 18 months, resulting in substantial verdicts and settlements in favor of employees for unpaid compensation, multiple damages, and attorneys’ fees against their present and former employees.
Most employers understand that the weekly employee payroll is sacrosanct. However, other forms of compensation owed to employees may also be considered “wages” under the Massachusetts Wage Act. Indeed, as employees continue to feel the crunch of the recession, they can be expected to offer creative arguments about why various types of financial arrangements should be considered compensation under the Wage Act.
Generally, the Wage Act dictates the timing of payments of wages to hourly and salaried employees, both during their employment and when employment ends. The purpose of the Act is to prevent an employer from unreasonably withholding earned wages. The term “wage” is not defined in the statute, however, other than to confirm that it includes vacation pay, holiday pay, and commissions which are “due and payable” and the amount of which has been “definitely determined.” Not only has the definition of “commission” proved somewhat difficult to apply, but there are many other forms of compensation that do not fit neatly into the traditional notion of a “wage.” For example, incentive commissions, bonuses, stock options, and other monetary arrangements must be carefully examined to see if, by their nature, they were intended to covered by the Wage Act. The following summarizes the applicability of the Wage Act to various types of compensatory arrangements, though it must be recognized that each inquiry is fact-specific and that the law continues to evolve.
Regular Pay
As noted above, hourly wages earned by workers and regular salary paid to exempt employees must be at the top of the list when an employer is deciding what to pay. Only a very few limited deductions from these wages (such as tax withholdings and pre-approved 401(k), stock, or cafeteria plan contributions) are allowed. That said, employers are increasingly implementing salary freezes, and even salary deductions. These methods of cost-saving are permissible only if they meet all employment law requirements. For example, if the salary of an exempt employee falls below $455 per week as a result of a salary reduction, the employee will no longer be “exempt” and must receive overtime pay for any hours worked over 40 hours per week. Additionally, salary cuts should be implemented in a non-discriminatory manner, preferably across a whole class of jobs, and ideally starting at the top.
Deferred Wages
If an employer institutes a wage freeze, it must be clear that the employer is not merely postponing the payment of wages until the company can afford to pay. Such an arrangement is prohibited by the Wage Act-even if the employee agrees to delayed payments. For example, in a 2003 case, Dobin v. CIOView Corp., decided in the Massachusetts Superior Court, the employee was hired to a management position as the company’s third employee. 2003 WL 22454602 (Mass. Super., October 29, 2003). Her salary was initially $75,000 per year, plus monthly commissions. Her annual salary was later increased to $95,000. Within a short period of time, the company’s financial condition deteriorated, with enough money to pay rent and utilities for several months, but not enough to pay its three employees. The plaintiff agreed to defer her salary for a while, as long as salaries were paid next after rent and utilities when money came into the company. The employee did not receive any salary for six months. She complained that the practice of deferring wages violated the Wage Act, even though she had agreed to the delay. She was promptly fired.
The Court agreed with the employee that her monthly salary was a “wage” which was required to be paid no more than six days after the termination of the monthly pay period. It did not matter that the employee had agreed to the deferred payments. The Wage Act does not contain any exception allowing an employee to waive the right to receive wages in a timely fashion. In fact, the Wage Act specifically says that an employer and employee cannot enter a contract that exempts the employer from these requirements. Therefore, the employee’s “voluntary” agreement to allow the company to defer her salary until business improved was void, even if the employee benefited from the delayed payments because the company stayed in business long enough to pay her everything she was owed.
In March 2009, a federal judge agreed that a contract allowing for the deferral of the company president’s wages violated the Wage Act. The president, a co-founder and investor in the startup company, signed an agreement stating that his salary for the first year could be deferred at the discretion of the Board but would be paid before any profits were distributed. Stanton v. Lighthouse Fin. Servs., Inc., 2009 WL 931659 (D. Mass. March 25, 2009). The company did not have any money, and the president received no salary. After fifteen months, the president complained to the Attorney General and then filed suit in federal court. The court found that the payments owed to the president were “wages” and the deferral provision was unlawful, even though the employer was a startup company, and the president agreed to the deferral of wages.
Vacation
Employers who provide paid vacation to employees are required to treat vacation pay like other wages, paying it when due and paying all earned vacation time at the end of employment. Employees may not forfeit vacation time that has already been earned. For example, the Supreme Judicial Court recently invalidated a vacation policy which granted employees vacation time, but which also included a provision that any vacation time remaining at the time of termination of employment would not be paid to the employee. Electronic Data Systems Corp. v. Attorney General (SJC-10260, June 11, 2009). In EDS, the plaintiff sought nearly five weeks of paid vacation time when he was terminated. The employer argued that vacation pay wages were not “due” under its policy, which stated that “vacation time is not earned and does not accrue. If you leave EDS, whether voluntarily or involuntarily, you will not be paid for unused vacation time (unless otherwise required by state law).” The Attorney General (“AG”) contended that once the employee accumulated vacation time, it became “due” under the definition of “wages,” and therefore had to be paid in full on the day of the employee’s discharge. The SJC recognized that on the one hand, the policy said that “vacation time is not earned”; on the other hand, the policy stated that employees were entitled to vacation pay based on the number of years they had worked. Citing the AG’s Advisory 99/1 regarding vacation pay, the Court agreed with the AG that vacation time granted to the employee on a yearly basis was “earned” and was therefore “wages,” and that the employer could not require employees to forfeit unused vacation time upon discharge.
Because employers are not required to provide vacation time at all, they may change vacation accrual policies prospectively. In order to reduce past vacation balances, which could result in large deficits if the business ultimately fails, employers may, with adequate notice, institute “use it or lose it” policies and may even accommodate a workplace shutdown for a short period of time through the use of paid vacations. However, if an employer interferes with an employee’s ability to take earned vacation time, the employer must pay the value of that time.
Sick/Personal Time
Absent an express agreement, an employee is not entitled to recover compensation for unpaid personal or sick time under the Wage Act. However, if an employer institutes a Paid Time Off system, allowing employees to take time off for any permissible reason from one bank of time, they should clearly state how much time will be allocated to vacation time to be paid out upon termination of employment. Ambiguities in a personnel policy regarding unused vacation time will be construed against an employer.
Commissions
As stated above, for commissions to qualify under the Wage Act, they must be “due and payable” and “definitely determined.” In 2007, the Massachusetts Appeals Court disagreed with earlier decisions which had engrafted other conditions on the payment of commissions under the Wage Act. As a result, it is now clear that commissions must be paid even if the employee also receives a “healthy” or substantial base salary. Commissions must be paid even if they were contingent on the happening of an event, as long as that event occurred and the amount owed is “arithmetically determinable.” And, commissions must be paid even if the employee does not fit the notion of a traditional commissioned employee who relies on commissions as a significant portion of weekly income.
On the other hand, commissions relating to “deals in the pipeline” are generally not considered “definitely determined” or “due and payable” and are not subject to the Wage Act. Moreover, where an employer, in a written compensation plan, retains the sole and absolute discretion to make final and binding adjustments to booking values on sales by its commissioned employees, the employer does not violate the Wage Act for making such adjustments or capping commissions owed, even if the adjustments result in a substantial decrease to an employee’s compensation.
Bonuses
In this era of belt-tightening, bonuses are likely to be first on the chopping block. “Bonus” payments are not specifically mentioned in the Wage Act. However, if the bonus is actually a temporary increase in salary, it would be covered by the Wage Act. And, if the bonus has the earmarks of a commission (such as being paid on a periodic basis based on certain records and according to a certain formula), then it would likely be covered by the Wage Act. Where bonuses are explicitly discretionary or based on subjective criteria regarding profitability, performance, or individual contributions, however, they are not “wages” and fall outside the scope of the Wage Act.
Incentive Payments
Some forms of incentive compensation or performance rewards are more like a commission, due and payable when earned. Others are more like a discretionary bonus. To minimize the possibility of such payments being considered “wages,” employers should have clear written policies that give them absolute discretion to set conditions and deadlines for eligibility, to cap or adjust amounts, and to pay at intervals convenient to the employer.
Contingent Salary Arrangements
When it is clear between the employer and employee that compensation for services will be irregular and subject to contingencies (for example, the receipt of grants or other funding), the Wage Act may not apply. A recent case involved a Term Sheet signed by an employer and employee fourteen months into an employment relationship. The Term Sheet was backdated to the beginning of employment, and set the employee’s compensation at “$240,000 per year, payable semi-monthly in arrears at the same time other payroll is paid [which] may be deferred indefinitely if cash is not available; however, deferred compensation must be paid before any profit distributions are made.” A Superior Court judge decided that the compensation structure was conditional and contingent and also included equity participation and profit-sharing components; thus, the Wage Act did not apply. The court refused to extend the Wage Act’s “protections and [] special remedies” to the employee. More recently, however, the Stanton case noted above has called into question whether the deferral of any wage pending profitability of the company is valid under the Wage Act, and any such arrangement deserves close attention.
Stock Option Plans
Employee stock purchase plans generally are not covered by the Wage Act. This point was confirmed in January 2009, when the Massachusetts Supreme Judicial Court (“SJC”) responded to a question posed by the United States District Court about whether the Wage Act governed an employee stock plan which required workers who quit or were fired to surrender all unvested company stock. Weems v. Citigroup, Inc., 453 Mass. 147 (2009). Under the employer’s program, a portion of the employees’ cash compensation was deducted and used to purchase stock. Before some of their stock vested, the employees voluntarily terminated their employment. They argued that the plan violated the Wage Act because when they forfeited their unvested stock, they also were required to forfeit the underlying portion of their earned wages which had been used to purchase the stock. The SJC decided that the Wage Act did not apply because the payroll program was voluntary, its benefits were not illusory, and the participants had effectively requested in writing that a designated percentage of their earned wages be used to purchase company stocks.
Severance Pay
Despite the staggering number of layoffs being reported in the media, many employers are still able to offer at least modest severance pay to their former employees. In some cases, severance pay is required by employment agreements signed at the beginning of employment. In the leading case on the issue of severance, Prozinski v. Northeast Real Estate Servs. LLC, the employee argued that his employment offer letter required the employer to pay him severance pay as part of his wage package. 50 Mass. App. Ct. 599 (2003). The Appeals Court disagreed on the grounds that severance pay was not “earned,” but was contingent upon the employee being terminated. In a different case, where an employment agreement required three months’ notice of an employee’s termination, during which time she would be paid her regular salary and benefits, the compensation due under the three-month notice period was found not to constitute “earned wages” under the Wage Act because the employee did not perform any work during those months. It is now generally recognized that severance pay is not a “wage” under the Act because it is a contractual obligation which does not depend upon any work being performed.
Payments to High Wage Earners
The Wage Act governs wages owed to all employees, regardless of where they fall on the pay scale. Thus, even highly-paid executive and professional employees may seek damages under the Wage Act for nonpayment of their ordinary base wages or wage equivalents. In an interesting twist, some of those same highly-paid executives (the president, treasurer, or other officer or agent with responsibility for management of the corporation) could also be personally liable under the Wage Act for failing to pay wages because they are deemed to be the “employer” under the statute. Their designation as employer calls into question their standing to bring a claim under the Wage Act in their own right for compensation.
At least one Superior Court judge has commented, however, that “it does not necessarily follow that a person cannot be both an employer and an employee” for purposes of the Wage Act. The Court reasoned that the Wage Act purports to protect all employees from the unreasonable detention of their salary and should not bar an employee from recovering unpaid wages, even if, under some circumstances, that employee could also incur personal liability for failing to timely pay other employees. Kohli v. RES Eng’g., Inc., 2000 WL -1876605 (Mass. Super., Memorandum of Decision on Motion to Dismiss, December 19, 2000). Moreover, the Stanton case recently confirmed that the co-founder of a startup company was an “employee” under the Wage Act, noting that “an individual may be an employer vis-à-vis subordinates and an employee vis-à-vis superiors.” Although the Massachusetts appellate courts have not yet decided this issue, a careful employer will treat all salary attributable to an officer or manager’s work as an employee as wages, to be paid timely and in full.
Payments to Independent Contractors
In situations where payments are owed to bona fide independent contractors, those payments fall outside the scope of the Wage Act, which governs only payments to employees. However, there is a heavy presumption in Massachusetts that workers who provide services to employers are employees, not independent contractors. All arrangements with independent contractors should be reviewed periodically to ensure compliance with the Independent Contractor Law.
Consequences of Failure to Pay
Under current law, failure to pay amounts due to employees under the Wage Act can lead to civil and criminal penalties, injunctive relief, and attorneys’ fees, as well as personal liability for the president, treasurer, and any officers or agents who manage the company. Moreover, as of July 2008, failure to pay wages to an employee when due (whether or not as the result of an honest mistake) now carries the automatic penalty of triple damages. The lesson is clear: when money is already tight, it is critical for employers to pay “wages” to employees and former employees in a timely manner, even where more vocal creditors are clamoring for attention.
More articles found in this edition of atLaw:
- Partner’s Letter
- Serving Our Clients in Difficult Economic Times
- Good Money After Bad? Deepening Insolvency—An Update
- Don’t Let One Bad Apple Spoil the Whole Bunch
- First, Pay All Wages
- Personal Information Protection
- Harold B. Murphy Joins American College of Bankruptcy
- Stephanie Scruggs Named Hanify & King Shareholder
