Massachusetts Superior Court judge has ruled in an issue of first impression that a real estate investment company’s deferred compensation plan is subject to the state’s Wage and Hour Act.

The defendant employer argued that because it intended to deposit an employee’s money into a retirement account, the deductions were not wages under G.L.c. 149 in the wake of the Massachusetts Supreme Judicial Court’s 2002 Boston Police Patrolmen’s Ass’n Inc. v. City of Boston ruling.

But Judge Edward P. Leibensperger disagreed, granting summary judgment in favor of the employee.

“The Wage Act is unequivocal in its mandate to pay an employee the wages due within six days of the termination of the pay period,” he wrote. “Absent such payment, there is a violation.”

Police rescue

Joel Rosen of Andover, Mass., who represented the plaintiff employee, said no appellate court has ever addressed whether Boston Patrolmen’s Ass’n applies to private sector Wage Act claims.

“When you win a case, you never want it to go up on appeal because you want the client to get the money,” he said. “But … this would be a good one for the SJC to take because they could finally give us some certainty in this area.”

In Boston Patrolmen’s Ass’n, a public sector dispute, the SJC held that deferred compensation contributions made to city employees did not constitute wages, Rosen said.

Since that ruling, he noted, many employers and their counsel have asked judges to interpret the case to hold that all similar deductions are not covered by the statute.

“I think lawyers who did not read the SJC’s case carefully may have been confused,” he said. “They may have thought, as the employer did in this case, that deferred compensation accounts could never be wages based upon a very broad reading of [Boston Patrolmen’s Ass’n].”

Leibensperger clearly said that argument must fail, Rosen added.

The SJC’s decision turned on the fact that the money in question remained the property of the municipality until the employee became entitled to it under the statute, Rosen said. The wages were therefore the property of the employer.

“But in the normal retirement account, the money becomes the employee’s immediately, so that is the main difference between the Boston Police Patrolmen’s case and ours,” he said. “As soon as it went into my client’s account, it was his.”

John C. Foskett of Deutsch, Williams, Brooks, DeRensis & Holland in Boston represented the city in Boston Patrolmen’s Ass’n. He said he was not aware that lawyers had been citing the 2002 ruling in private sector suits.

“I’d really be surprised if it could be used for a broader proposition because the case really turned on the application of the Internal Revenue Code, which is essentially the public sector equivalent to 401(k),” he said. “The Internal Revenue Code created a fiction that the amounts deducted belonged to the employer until the employee can pull them out of the account under the Internal Revenue Code.”

The reason for such a plan was to create a situation in which the deductions were not taxable, Foskett said.

“The court held that as long as the funds were getting into the hands of the plan administrator within a reasonable time, there was no violation of state wage laws,” he said.

The employer’s counsel in Gorin, Robert E. McLaughlin Jr. of Gilman, McLaughlin & Hanrahan in Boston, declined to comment due to a post-summary judgment motion pending before the judge.

Costly deduction

In 2004, plaintiff Timothy Pacheco was hired as a mechanic by defendant Gorin Associates. A few months later, he accepted an offer to participate in a retirement program that deducted $82.40 from each of his weekly paychecks.

Between 2005 and 2007, $8,604 was deducted.

Although the employee and his wife regularly asked for updates on the status of the account, the company failed to provide any information.

In December 2007, the employer informed Pacheco that it had never established a retirement account. When the company offered his wife $8,075, she refused to accept due to the tax implications and because the amount did not reflect the total her husband was owed.

After hiring an attorney, Pacheco obtained a right-to-sue letter from Massachusetts Attorney General Martha Coakley’s office. When the company failed to respond, Pacheco filed a complaint in Superior Court.

Case distinction

In granting summary judgment for the employee, Leibensperger called the employer’s conduct “outrageous” and said its argument that the withheld amounts were not wages was purely “hypothetical.”

The retirement account was, in fact, never created, the judge wrote. Instead, the money deducted from the employee’s paychecks was held by the employer and never paid to him.

“It defies logic to rely upon what was supposed to occur, but did not, as a basis for exoneration from the strict requirements of the Wage Act,” the judge said. “The fact that no retirement account was ever created … distinguishes this case from [Boston Patrolmen’s Ass’n] relied upon by defendants.”

In the SJC decision, Leibensperger wrote, the city had offered its employees a deferred compensation plan under the Internal Revenue Code. The code provides that, in order to obtain tax-deferral benefits, the contributions must remain the property of the employer until they are made available to the employee.

“In deciding that the pay reductions were not wages under the Wage Act, the [SJC] focused on determining the owners of the contributions, i.e., whether the contributions were the employee’s or the employer’s property,” the judge said.

Under the plan in Gorin, contributions deducted from the employee’s weekly paycheck were slated to vest immediately upon being transferred into his account, Leibensperger said.

“[U]nlike Boston Patrolmen’s, there is no Massachusetts statute specifically authorizing the deferral of payment of wages so as to qualify for tax benefits under the Internal Revenue Code,” he said. “Because this Court holds that the deductions from Pacheco’s pay constitute wages under the Wage Act, this Court finds that the defendants violated the Wage Act by failing to pay Pacheco his wages within six days of the termination of the pay period during which those wages were earned.”

CASE: Pacheco v. H.N. Gorin, Inc., et al.

COURT: Superior Court

ISSUE: Does a real estate investment company’s deferred compensation plan constitute a wage under the Wage and Hour Act?

DECISION: Yes