Alert March 09, 2011

Recent Developments Under the Massachusetts Wage Act

Employers that pay wages late or unlawfully claw back wages of Massachusetts employees face the possibility of treble damages, individual liability, civil penalties and attorney’s fees under the Massachusetts Wage Act (the “Act”).  Two areas of debate surrounding the Act have been (i) the issue of what constitutes a “wage” under the statute, and (ii) the extent to which employers can lawfully deduct from wages to recover debts owed by employees.  Three recent Massachusetts court decisions address these subjects.

Superior Court Judge Curran’s decision in Juergens v. MicroGroup, Inc. and the Appeals Court’s decision in Suominen v. Goodman Indus. Equities Mgmt. Group, LLC address what constitutes a “wage” under the Act.  The Supreme Judicial Court’s decision in Camara v. Attorney General explores when and how employers can recoup money owed by employees through wage setoffs.

The Massachusetts Wage Act

The Act was enacted to prevent employers from unreasonably depriving employees of earned “wages.”  To that end, the Act generally requires employers to pay employees within six days of the end of the pay period during which the wages were earned.  When employers involuntarily terminate employees, the Act requires employers to pay all earned wages on the date of discharge.

The Act also generally prohibits employers from deducting wages from employee pay checks after they are earned.  The Act creates an exception for “valid setoffs” against wages.

The Act prohibits employers from avoiding their obligations by a “special contract” with their employees.

Beyond expressly identifying holiday and vacation pay due under any agreement and commissions that have “been definitely determined” as wages, the Act is silent on what constitutes a “wage.”  The Act is also silent on when a deduction constitutes a “valid setoff” against employee wages.

What Constitutes a Wage?  Juergens and Suominen

Along with the three categories of “wages” explicitly included in Section 148 – holiday pay, vacation pay and commissions – the Act undisputedly protects the weekly or biweekly regular pay earned by employees for labor performed or services provided during the pay period.  Massachusetts courts typically have refrained from extending the definition of wages beyond these four categories.  Yet in his recent decision in Juergens, Judge Curran controversially expanded the Act’s scope, holding that severance pay is a protected wage under the Act.

To entice the employee to join the company, the employer in Juergens agreed at the outset of employment to pay him six months of severance pay upon termination absent cause.  Later, the employer eliminated the employee’s position and laid him off.  The employer never told the employee that his employment was terminated for cause.  Yet the employer did not pay the agreed-upon severance pay.  The employee sued, claiming, among other things, that by failing to pay the severance pay on the day of discharge, the employer violated the Act.

Judge Curran held that the severance pay was a wage under the Act, due on the day of discharge.  He did so despite the Appeals Court’s 2003 holding in Prozinski v. Northeast Real Estate Servs., LLC that severance pay is not a form of wages.  In Judge Curran’s view, the Prozinski decision was displaced by the SJC’s decision in Wiedmann v. Bradford Group, Inc., which, he found, “authorized a more expansive interpretation of the Wage Act.”

Although the Juergens decision received considerable attention, its expansion of the Act’s scope is open to question, particularly in light of the subsequent Appeals Court decision in Suominen.  In Suominen, a construction manager and his employer, a real estate developer, reached an agreement at the commencement of employment that the construction manager would share in the profits of successful development projects.  After his termination, the employee sued the employer, alleging, among other things, that the employer violated the Act by failing to pay money owed under the profit-sharing arrangement.

The Appeals Court agreed with the trial court that any money owed to the employee under the profit-sharing arrangement was not a wage covered by the Act.  The court recognized the four categories of wages protected by the Act, and went on to reject the employee’s argument that the compensation owed under the profit-sharing arrangement was a protected commission.  Because the compensation at issue was not a commission (and, implicitly, because it did not fall within the other three categories of protected wages), the court affirmed the dismissal of the employee’s Act claim.

The judge’s reasoning in Juergens is difficult to reconcile with the Suominen decision’s implicit reasoning that a wage must fall within one of the four recognized categories.  Suominen provides useful support for the proposition that the Act’s scope should not be extended beyond the four accepted categories of wages.

When May Employers Deduct Wages?  Camara

As noted above, the Act does not define what is a “valid setoff” against wages.  The SJC held in its 2009 decision in Somers v. Converged Access, Inc. that a setoff is valid only when it is used to recover a “clear and established debt.”  The SJC’s recent decision in Camara addresses when a debt owed by an employee is “clear and established,” so as to be recoverable through a wage setoff.

In Camara, ABC Disposal Service, Inc. (“ABC”), a waste disposal and recycling company, used wage setoffs to deter its drivers from unsafe and careless driving that caused accidents in company vehicles.  In lieu of discipline, ABC offered its drivers the option of entering into a wage setoff agreement that allowed the company to recover the cost of property damage caused by the driver from the driver’s wages.  Under the agreement, before any wage setoff occurred, ABC was required to investigate any accident to determine whether it was preventable.  After finding that an accident was preventable – in other words, that the driver was at fault – ABC again required the driver either to accept discipline for the accident or pay for the damage through a wage setoff.

On appeal, the SJC struck down ABC’s wage setoff policy, holding that it violated the Act.  The court first confirmed that employers may not contract their way out of the Act’s requirements.  According to the court, regardless of any potential benefit that the drivers derived from the agreement, the agreement was a prohibited “special contract.” 

Further, the SJC held that the agreement resulted in invalid setoffs against wages because any potential driver debt determined under the agreement was not “clear and established.”  According to the SJC, neither the drivers’ negligence nor their debt was clear and established because ABC: (i) was the sole arbiter of the driver’s fault and how much the driver owed for property damage; (ii) did not afford drivers an opportunity to appeal a finding of fault; and (3) offered drivers only the “unpalatable choices” of wage setoffs or discipline.  Thus, the SJC found that ABC’s setoff policy violated the Act and upheld the Attorney General’s civil penalty award.

Implications for Employers

No bright line test currently exists for determining whether severance pay is a wage covered by the Act.  Until conflicting precedent is resolved, employers that enter into severance pay agreements at the outset of or during employment should carefully analyze the terms of their agreements to determine when that severance pay reasonably becomes earned by and owed to the employee.  In their analysis, employers should bear in mind the onerous consequences of misclassification under the Act – namely mandatory treble damages and potential individual liability for the president, treasurer and other senior management employees.

Regardless of whether the Juergens decision is viable, it should not apply to severance pay offered to departing employees as part of individually negotiated separation agreements.  Further, disputes concerning severance pay plans, as distinguished from severance pay agreements individually negotiated before or during employment, should be preempted by ERISA.

After determining that compensation owed to an employee is a wage covered by the Act, employers should be careful to deduct from that wage only to recover clear and established debts owed by the employee.  Under Camara, employers may not recoup the cost of property damage caused by employee negligence without an independent finding of liability and the debt owed. 

Yet Camara does not hold that an independent investigation is always required for a debt to be clear and established.  An independent investigation likely would not be required, for example, when an employee admits to stealing or embezzling company funds and the amount owed is not and cannot be disputed. 

Employers can mitigate exposure under the Act by applying setoffs only to non-wage compensation, such as discretionary bonuses, or by requiring employees to repay debts owed as a condition of continued employment (via a check written by the employee rather than payroll deduction).