In Massachusetts, Severance Pay is Not Subject to the Wage Act but Not All Payments Triggered by Termination are Severance Pay

While traditional severance pay falls outside of the Wage Act in Massachusetts, not all payments pursuant to a termination of employment are excluded. This is significant because, in a dispute with an employer, courts may award up to treble damages as well as reasonable attorney’s fees and costs under the Wage Act.

It is not uncommon with start-up companies and businesses facing financial difficulties in this tough economy that employees are asked to take pay cuts with the promise of making up the difference when finances get better. This can be tricky when the employment relationship is terminated and the employee has not recouped her wage concessions.

Example Employee and Employer voluntarily agreed to reduce the Employee’s compensation by 25% but this amount would accrue as deferred compensation until the employee left the company, provided the company returned to certain levels of financial performance. This arrangement was documented in a letter signed by a corporate officer and the Employee.

The Employee left the company just as the company hit the performance threshold, and the Employer refused to honor the deferred payment arrangement. The Employee has filed suit in Superior Court under the Massachusetts Wage Act for the wrongful withholding of wage payments, seeking treble damages, attorney’s fees and costs.

Issue Does the post-termination payout arrangement contained in the Employee-Employer letter constitute a “wage” whose timely payment was mandated under the Massachusetts Wage Act?

Answer Yes. The post-termination payout letter was drafted in order to compensate the Employee for her regular job performance for a period where she received a reduced rate of pay.

Courts throughout Massachusetts, as well as the United States District Court (D-Mass.), have held that such deferred amounts are ‘vested wage equivalents,’ properly due the employee under the Wage Act. Although it is recognized that executive bonuses and additional, achievement-driven modes of compensation fall outside the scope of the Wage Act, the overall profitability of a company is not a contingency that removes deferred or substituted wage earnings from the Act’s scope. Finally, no successful argument has yet been made that a deferred or substituted payment of wages constitutes
severance pay, excluded from the Wage Act, simply because the payments share the same trigger of employment termination.

Discussion The Massachusetts Wage Act requires employers to pay employees earned wages in a timely fashion in order to prevent the long-term detention of wages by unscrupulous employers. Although the Act has been construed narrowly, the courts of Massachusetts have made clear that the plain language of its terms will be enforced without exception, including the specific provisions concerning the payment of weekly, bi-weekly or semi-monthly ‘wages,’ holiday pay, vacation pay, as well as definitely determined commissions due and payable. With regard to commissions, at least once court in Massachusetts has reviewed the legislative history of the Act in order to conclude that, in addition to the ‘definitely determinable’ requirement, any commissions falling under the purview of the Wage Act should constitute a “significant part of the [employee’s] weekly income.”

In the example above, Employee’s original compensation consisted of salary. Employee was compensated for her regular job performance through a stream of bi-weekly payments.

Having determined that the compensation received by the Employee falls within the scope of the Wage Act, the next step is to analyze the agreement in which the Employee and Employer agreed to modify and reduce the Employee’s rate of compensation. The Employee and Employer signed a letter deferring the make-up payments until the time of employment termination, provided the Employer had returned to certain profitability levels, which had been met.

Note the distinction of this arrangement, based on earned wages from regular job performance, as opposed to a bonus or severance package. Courts in Massachusetts have identified bonuses as additional modes of compensation, the provision of which are contingent on the employee achieving specific results or levels of superior job performance. In Stanton v. Financial Services, the Federal District Court (Massachusetts) distinguished these employee-driven contingencies from the improved financial position of a company, the latter of which triggers restored salary payments noting that under such plans, “the individual’s salary is not contingent upon performing any condition beyond her job.”
The Employee-Employer agreement in our example is distinguished from severance pay, held to be outside the scope of the Wage Act by the Massachusetts Appeals Court as “money due to an employee under contractual obligations, regardless of whether work was actually performed.” Although the Employee-Employer agreement shares the same trigger for payment as a traditional severance package-employee termination -this is not the determinative factor in assessing the character of the agreed payments upon termination. The determinative factor is whether the payout represents earned wages.

Conclusion If you have had salary or commission deferred and your employer refuses to pay, you may be eligible for up to three (3) times the amount owed, plus attorney’s fees and costs if you satisfy the criteria under the Wage Act.

Please note that this communication does not constitute legal advice. If you have a question about this topic or any other business law or employment matter, call or email The Brown Law Firm, LLC, a Massachusetts firm dedicated to business and employment law.

Massachusetts Wage Act, M.G.L. ch. 149 ยงยง 148-150.

Prozinski v. Northeast Real Estate Services, 59 Mass. App. Ct. 599 (2003).

Commonwealth v. Savage, 31 Mass.App.Ct. 714, 716 (1991).

Allen v. Intralearn Software Corp., 2006 Mass. App. Div. 71.

Fitzgerald v. Chipwright Designs, Inc. 19 Mass. L. Rep. 558 (2005).

Dobin v. CIOview Corp., 16 Mass. L. Rep. 785 (2003).

Dennis v. Jager, Smith & Stetler, 2000 Mass. Super. LEXIS 114
Doucot v. IDS Scheer, Inc., 2010 U.S. Dist. LEXIS 80903.

Stanton v. Lighthouse Financial Services, Inc., 621 F.Supp. 2d 5 (D. Mass. 2009).

Cumpata v. Blue Cross Blue Shield of Mass., Inc., 113 F.Supp. 2d 164 (D.Mass. 2000).

Baptista v. Abbey Healthcare, Inc., 1996 U.S. Dist. LEXIS 22797.

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