First, pay all wages

In these challenging economic times, employers may need to prioritize payments to third parties, often paying the “squeaky wheel” first, but thinking that payments owed to employees are less pressing is a mistake.

Most employers understand that weekly employee payroll is sacrosanct. However, other forms of compensation may also be considered “wages” under the Massachusetts Wage Act. Failure to pay “wages” may result in substantial verdicts or settlements for unpaid compensation, multiple damages, and attorneys’ fees.

Generally, the Wage Act dictates the timing of payments of wages to hourly and salaried employees, both during and at the end of employment. The term “wage” is not defined in the statute other than to confirm that it includes vacation pay, holiday pay, and commissions that are “due and payable” and “definitely determined.”

There are many other forms of compensation that do not fit neatly into the traditional notion of a “wage” but which may be covered, such as bonuses, stock options, and other monetary arrangements. Each inquiry is fact-specific, and the law continues to evolve.

Hourly wages and regular salary payments must be at the top of the accounts payable list. Very few deductions from these wages (e.g., taxes, 401(k), stock, or cafeteria plan contributions) are allowed. That said, cash-strapped employers may lawfully implement salary freezes and even salary deductions. Note that if the salary of an exempt employee falls below $455 per week, the employee will no longer be “exempt” from the overtime laws.

Deferred wages

If an employer freezes wages, 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 act — even if the employee consents. For example, in Dobin v. CIOView Corp., the employee was hired to a management position as the company’s third employee. The company’s financial condition deteriorated, with only enough money to pay rent and utilities, but not enough to pay the employees. The plaintiff agreed to defer her salary so long as salaries were paid next after rent and utilities. The employee received no salary for six months. When she complained, she was fired.

The court agreed that the monthly salary was a “wage” that was required to be paid no more than six days after the end of the monthly pay period. It did not matter that the employee had agreed to the deferral — the act does not allow an employee to waive the right to receive wages in a timely fashion. The employee’s “voluntary” agreement to defer her salary until business improved was void.

In March 2009, a federal judge reached the same conclusion when the president, co-founder, and investor in a startup company agreed to defer his salary until the company achieved profitability. Stanton v. Lighthouse Fin. Servs., Inc.

Vacation

Employees must treat vacation pay like other wages, paying it when due and paying out earned time at the end of employment. Employees may not forfeit earned vacation time. The Supreme Judicial Court recently invalidated a vacation provision stating that “vacation time is not earned and does not accrue. If you leave [the company], whether voluntarily or involuntarily, you will not be paid for unused vacation time.“ Electronic Data Systems Corp. v. Attorney General.

The attorney general contended that once employees accumulated vacation time, it became “due” and had to be paid in full upon discharge, even if the policy said that “vacation time is not earned.” Citing the AG’s Advisory 99/1, the court agreed that vacation time granted to employees on a yearly basis constituted “earned” wages that could not be forfeited.

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 liabilities if the business ultimately fails, employers may, with adequate notice, institute “use it or lose it” policies and cap vacation accruals. However, if an employer interferes with an employee’s ability to take earned vacation time, the employer must pay the value of that time.

Absent an express agreement, personal and sick time are not wages. If sick time is merged with vacation time under a Paid Time Off system, the policy should clearly allocate how much time will be paid out upon termination of employment. Ambiguities will be construed against an employer.

Commissions, bonuses and other ‘wages’

Commissions qualify as “wages” if they are “due and payable” and “definitely determined,” even if the employee also receives a substantial base salary. Commissions must be paid even if contingent on the happening of an event, so long as that event occurs and the amount owed is “arithmetically determinable.”

Commissions relating to “deals in the pipeline” are generally not wages. Moreover, if an employer, in a written compensation plan, retains the sole and absolute discretion to make final and binding adjustments to booking values on sales, the employer does not violate the act, even if the adjustments substantially decrease an employee’s compensation.

In this era of belt-tightening, bonuses may be first on the chopping block. Bonuses are not specifically mentioned in the act, but may be covered if they resemble a disguised increase in salary. Or, if the bonus has the earmarks of a commission (paid periodically based on certain records, according to a certain formula), it would likely be covered.
Where bonuses are explicitly discretionary or based on subjective criteria regarding profitability, performance, or individual contributions, however, they fall outside the scope of the act. To minimize the possibility of bonus or other incentive payments being considered “wages,” employers should develop clear written policies retaining absolute discretion to set conditions and deadlines for eligibility, to cap or adjust amounts, and to pay at intervals convenient to the employer.

Employee stock purchase plans generally are not covered. In Weems v. Citigroup, Inc., the employer offered a program whereby a portion of the employees’ cash compensation was deducted and used to purchase stock. Before their stock vested, the employees voluntarily terminated their employment. They argued that the forfeiture of unvested stock resulted in the forfeiture of earned wages.

The SJC held that there was no violation because the stock plan was voluntary, its benefits were not illusory, and the participants had requested that their wages be used for that purpose.

Despite the flood of layoffs in 2009, many employers have tried to offer at least modest severance packages. In some cases, severance is required by agreements signed earlier in the employment. In the leading case on the issue of severance, Prozinski v. Northeast Real Estate Servs. LLC, the employee argued that his offer letter guaranteed him severance as part of his wage package.

The Appeals Court disagreed, holding that severance was not “earned,” but was contingent upon the employee being terminated. It is now generally recognized that severance pay is not a “wage;” rather, it is a contractual obligation that does not depend upon any work being performed.

High wage earners and independent contractors

The Wage Act governs wages owed to all employees, regardless of where they fall on the pay scale. Thus, even highly paid executives and professionals may seek damages under the act for nonpayment of their base wages or equivalents. In an interesting twist, some of those same executives (the president, treasurer, or other officer or agent with responsibility for management of the corporation) could also be personally liable under the act for failing to pay wages because they are deemed to be the “employer” under the statute.

At least one court commented that “it does not necessarily follow that a person cannot be both an employer and an employee,” reasoning that the act purports to protect all employees from the unreasonable detention of their salary. Kohli v. RES Eng’g., Inc.

The Stanton case also noted 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 that issue, a careful employer will treat all salary attributable to a manager’s work as an employee as wages, to be paid timely and in full.

Payments owed to bona fide independent contractors fall outside the scope of the act. However, the presumption in Massachusetts is that workers who provide services are employees, not independent contractors. Arrangements with independent contractors should be reviewed periodically to ensure proper classification.

Consequences of failure to pay

Failure to pay amounts due under the act can lead to civil and criminal penalties, injunctive relief, and attorneys’ fees, as well as personal liability. As of July 2008, failure to pay wages when due (whether or not as the result of an honest mistake) also carries the automatic penalty of triple damages. The lesson is clear: when money is already tight, it is critical for employers to pay “wages” in a timely manner, even where more vocal creditors are clamoring for attention.

Karen A. Whitley is a shareholder at Hanify & King in Boston, where she leads the firm’s employment law group. She defends employers in court and arbitration settings and counsels them on compliance with federal and state employment laws and can be contacted at [email protected].