The Massachusetts Wage Act provides that an employee who “prevails” in an action to recover unpaid wages “shall … be awarded the costs of the litigation and reasonable attorneys’ fees.” This “fee-shifting” provision is an exception to well-established “American Rule” under which each party bears his or her own attorneys’ fees, win or lose. In cases where the employee wins at trial, the application of the Wage Act’s fee-shifting provision is clear: the employee will recover his or her attorneys’ fees. But what happens when the case doesn’t go to trial, and instead, the parties resolve the matter through a negotiated settlement in which both sides compromise? Has the employee “prevailed” in that situation? Is he or she entitled to recover attorneys’ fees?

The Massachusetts Supreme Judicial Court recently answered this question in a case called Ferman v. Sturgis Cleaners, Inc. The SJC explained that there are only two well-defined approaches for determining whether a party has “prevailed” in a settlement. The first is called the “catalyst” test, which asks whether the plaintiff’s lawsuit was “a catalyst for [the] defendant’s voluntary change in conduct.” The second approach is called the “Buckhannon” test (named after a 2001 U.S. Supreme Court case), which requires an additional step of a judge approving the parties’ agreed-upon material change in their legal relationship. The SJC noted that it had already ruled, in an earlier case, that the Buckhannon test does not apply to Massachusetts fee-shifting statutes, but it had never explicitly adopted the catalyst test. In Ferman, the SJC took this “logical next step,” and held that “a plaintiff prevails for purposes of an award of attorneys’ fees under the Wage Act when his or her suit … [is] a necessary and important factor in causing the defendant to provide a material portion of the relief demanded in the plaintiff’s complaint.”

In explaining its holding, the SJC noted the twin purposes of fee-shifting statutes: first, they serve as a disincentive against unlawful conduct; second, they promote access to the courts for claimants who cannot afford to pay for counsel, and whose cases might otherwise appear too “small” to be financially profitable to an attorney. The catalyst test, the Court said, encourages prompt settlement of meritorious cases by preventing employers from escaping liability for attorneys’ fees by agreeing to an “eleventh hour” settlement on the eve of trial. The Court also noted that the catalyst test does not reward frivolous lawsuits. Such cases might result in a “nuisance settlement,” which would not meet the catalyst test’s requirement that the settlement include a “material portion” of the relief sought, and therefore the plaintiff would not be entitled to recover attorneys’ fees.

Since attorneys’ fees can constitute a significant portion of the possible recover in a Wage Act case, employers facing such claims should consult with their counsel to determine whether early resolution through settlement makes sense to resolve the matter and minimize exposure for attorneys’ fees liability.

This article was originally posted by McLane Middleton.