Employment Agreement Requires Employee to bring Massachusetts Wage Act in New York

The Massachusetts Supreme Judicial Court recently upheld a forum selection clause in an employment contract an employee to being his employment claims in New York courts.  In Melia vs. Zenhire, Inc., SJC-10959, (May 8, 2012), the employee brought a Massachusets Wage Act claim for unpaid salary in Massachusetts Superior Court.  Judge Troy dismissed the case on request of the employer due to the forum selection clause, reasoning that the plaintiff could bring his case in New York.  After initial appeal, the SJC took the case and held the following:

[W] e now recognize a presumption that forum selection clauses are enforceable with respect to Wage Act claims. A party seeking to rebut this presumption must produce some evidence indicating that (1) the Wage Act applies; (2) the selected forum’s choice-of-law rules would select a law other than that of Massachusetts; and (3) application of the selected law would deprive the employee of a substantive right guaranteed the Wage Act. On the introduction of such evidence, the proponent of the forum selection clause would retain the ultimate burden of demonstrating that the clause does not operate as a “special contract.”.

The Massachusetts Wage Act prohibits “special contracts” that would operate to allow an employer to escape or evade the provisions of the Act.  A “special contract” does not have to be a separate contract, but can be a provision in an employment or other agreement that, if enforced, would deprive an employee of his Wage Act rights.

A forum selection clause will also be unenforceable if  procured with “fraud, duress, the abuse of economic power, or any other unconscionable means,” according to the SJC, but in from now on they will be valid unless the employee makes the three showing (set forth above) required to overturn a forum selection clause in a Wage Act case.

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Treble Damages and Attorneys’ Fees under the Massachusetts Wage Act

The right to get paid your wages is extraordinarily strong, even if you’re mislabeled as an independent contractor. The reason for this is Massachusetts Wage Act and the fact that it provides for mandatory treble damages and attorneys’ fees for successful claims for unpaid salary, bonuses, commissions, vacation pay, and the like. The Massachusetts Overtime Law does the same for those entitled to overtime.

Treble damages: This is a fancy way of saying triple damages. If you’re owed $5,000, once you bring a formal complaint, the law says you’re owed $15,000. Prior to a change in the law in July, 2008, it was necessary to show that the employer willfully violated the Wage Act in failing to pay the wages in question. This was not always ensured and created substantial risk for the wage plaintiff. Now, there is no requirement of willfulness and a employer cannot introduce evidence that the failure to pay was simply a mistake. Importantly, the right to treble damages arises only after a complaint is file in court. That is because of this language in MGL c. 149, s. 150:

The defendant shall not set up as a defence [sic] a payment of wages after the bringing of the complaint.

Even if the case is ultimately settled for less than three times the wages, treble damages creates very strong motivation to contact a lawyer and get a complaint filed in court as soon as possible. Many employee lose out on multiple damages by negotiating themselves with their former employers. We are Boston wage lawyers, and it’s easy to reach us at 617-338-9400 or by email to info@masswagelaw.com.

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Massachusetts Wage Claims for Misclassified Independent Contractors

Updated Oct. 2016

Employers love calling their workers independent contractors.  As the SJC has pointed out, employers receive a windfall when they misclassify employees as independent contractors:

The “windfall” the Legislature appeared most concerned with is the “windfall” that employers enjoy from the misclassification of employees as independent contractors: the avoidance of holiday, vacation, and overtime pay; Social Security and Medicare contributions; unemployment insurance contributions; workers’ compensation premiums; and income tax withholding obligations. […] Misclassification not only hurts the individual employee; it also imposes significant financial burdens on the Federal government and the Commonwealth in lost tax and insurance revenues. Moreover, it gives an employer who misclassifies employees as independent contractors an unfair competitive advantage over employers who correctly classify their employees and bear the concomitant financial burden.

Somers v. Converged Access, Inc., 454 Mass. 582 (Mass. 2009).

 

In Massachusetts, unless you are truly running an independent business and doing limited consulting for a company, you’re likely an employee. Here are the more technical points based on the Massachusetts Independent Contractor statute, M.G.L, c. 149, § 148B. An employer has the burden of proving that all three of the following are true in order for someone to be an employee:

(1) the individual is free from control and direction in connection with the performance of the service, both under his contract for the performance of service and in fact; and

(2) the service is performed outside the usual course of the business of the employer; and

(3) the individual is customarily engaged in an independently established trade, occupation, profession or business of the same nature as that involved in the service performed.

The employer can lose if any one of these factors is false. The second “prong” of the test means that it is never legal to call someone a independent contractor who does the normal and usual work of the business. For example, a cleaning company can’t call their cleaners independent contractors, though it can hire a CPA to do its tax returns as a contractor:

The example of the CPA helps illustrate the other two aspects of the test. The CPA is a professional, free to do his job in the manner he likes, while his work product is ultimately subject to his client’s approval. The CPA is also likely running a business in which he prepares tax returns for many businesses and individuals, so he would be a contractor under the third prong of the test as well.

As the quotation from the SJC above points out, there’s a lot to gain for employers who misclassify employees and contractors. So what are the downsides? First, the taxing authorities are intent on pursuing employers who misclassify employees. This can result in substantial penalties. There also are a variety of sanctions, including civil and criminal penalties, that can be assessed by the state. Importantly, employees wrongly designated as contractors may also be deprived wages and other employment benefits which may give rise to a claim for treble (triple) damages and attorneys’ fees under the Massachusetts Wage Act.  Deductions may be being taken from contractors that could not be taken from employees.

Also, it not uncommon for an “independent contractor” to work overtime.  If contractor-employee works overtime hours, he or she is entitled to 1 1/2 times their regular rate of hourly pay unless they are exempt from overtime.  It is the nature of the work done that principally determines whether an employee is entitled to overtime; however,  “independent contractor” are not magic words that makes someone exempt from overtime.

So, what damages can be recovered by an employee wrongfully classified as a contractor?  As the SJC put it in the previously-quoted case:

The plaintiff will be entitled under G. L. c. 149, § 150, to “damages incurred,” including treble damages for “any lost wages and other benefits.” The “damages incurred” will include any wages and benefits the plaintiff proves he was denied because of his misclassification as an independent contractor, including the holiday pay, vacation pay, and other benefits that he would have been entitled to as [an] employee. In addition, if [the employer] cannot demonstrate that the plaintiff was an exempt employee under the overtime act, G. L. c. 151, § 1A, the plaintiff will be entitled to the amount he demonstrates that he should have received for overtime based on his hourly wage of sixty-five dollars.

Somers at 594.

Many deductions are also recoverable as damages. Independent contractor misclassification is a rampant problem in Massachusetts and may entitle you to significant damages if you have a good case. Contact us by phone at 617-338-9400 or by email to info@masswagelaw.com if you want a free case evaluation on the topic.

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What is a “Valid Set-off” under the Massachusetts Wage Act

Unpaid wage law continues to develop the in Massachusetts.  Most recently, the Supreme Judicial Court (“SJC”) provided extensive guidance on what constitutes a valid deduction from wages–called a “valid set-off” in the law.  In Camara v. Attorney General, 458 Mass. 756 (2011), the employer was a garbage collection and recycling company in New Bedford.  It found that its drivers would sometimes damage the trucks and/or people’s property in the course of doing their jobs.  It designated an employee to investigate incidents involving property damage, and if the accident was deemed to be due to the employee’s fault, gave the employee a choice: accept job discipline or pay the damages via a wage deduction.  The Massachusetts Attorney General investigated and issued a citation to the employer.  Appeals followed, and the SJC took the case.

The SJC found against the employer.  And expended some considerable effort to draw lines of what would be permissible as wage set-offs in Massachusetts.  The crux of the the decision in Camara was that the employer had carte blanche to make a final, un-reviewable decision about the employee’s fault and impose either discipline or a wage set-off.  The SJC did not find that this set-off was “valid” under the law because of the lack of due process for the employee, which fell far below what a person in the dock for negligence would be afforded.  As the court put it, the law “does not support the proposition that such liability may exist solely by virtue of an employer’s pronouncement, without any need for independent determination or adjudication.”

However, some wage set-offs apart from tax deductions, retirement plan contributions, union dues, and judicial wage attachments are valid under Massachusetts law.  Some examples cited by the attorney general are:

Where there is proof of an undisputed loan or wage advance from the employer to the employee; a theft of the employer’s property by the employee, as established in an “independent and unbiased proceeding” with due process protections for the employee; or where the employer has obtained a judgment against the employee for the value of the employer’s property.

The SJC went on to say:

We do not understand the Attorney General to be arguing that these are the only types of setoffs that are permissible under § 150; if that is her point, we do not agree with it. There well may be other circumstances — for example as part of a collective bargaining agreement — in which an employer and employee enter into a set-off arrangement that does not involve formal judicial or administrative proceedings but that would be valid because it can be shown that the parties have voluntarily agreed to a set of appropriately independent procedures for determining, in a manner that adequately protects the employee’s interests, both the existence and amount of the debt or obligation owed by the employee to the employer.

The SJC alluded to the fact that the employer’s policy in Camara was very effective, stating: “Between 2003 and 2006, ABC’s costs attributable to damage done to vehicles and personal property has been reduced by seventy-eight per cent.”   However, the bottom line is that Massachusetts law holds employee wages sacrosanct, and right or wrong, employers must think twice before getting creative with wage deduction policies.

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Wage Act Statute of Limitations in Massachusetts

The statute of limitations for a claim for unpaid wages is three years.  See M.G.L. c. 149, § 150.  The statute of limitations for contract claims is six years, so a claim for unpaid wages can be brought after the three year period but before the expiration of six years.  However, because of the Massachusetts Wage Act’s provision for mandatory treble damages and attorneys fees, employees are well advised to act to bring their claims quickly.  The limitations clock starts ticking upon a “violation.”  In other words, on the day you should have been paid the wages but weren’t.

Another important Wage Act timing note: a complaint via the Massachusetts Attorney General is a prerequisite to suit.  A Wage Act lawsuit can only be brought after the expiration of 90 days after filing a special complaint with the attorney general or more quickly if the attorney general provides you or your attorney a private right of action letter.  Timing is important in a Wage Act lawsuit because filing a complaint in court locks in your entitlement to three time your unpaid wages.  That is because the Section 150 provides: “The defendant shall not set up as a defense a payment of wages after the bringing of the complaint. ”

 

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Are Bonuses Wages in Massachusetts?

As I wrote previously, the Massachusetts Appeals Court recently decided the case of Suominen v. Goodman Industrial Equities, 78 Mass. App. Ct. 723 (2011).  In Suominen, the plaintiff was a former construction manager of a small real estate development firm and was promised a share of “overall profits generated by the development efforts.”  Suominen argued that this was a commission under the Massachusetts Wage Act, M.G.L. c. 149, s. 148.  The panel upheld the trial court’s ruling against Suominen on his Wage Act claim.  In the view of the panel, Suominen’s incentive compensation was different than a typical commission, which it defined as a “percentage of the money taken in on sales, given as pay to a salesclerk or agent, usually in addition to salary or wages.”  The panel called the compensation at issue a “profit-sharing arrangement.”  Since many types of compensation could be cast as profit-sharing arrangements, what will this decision mean in future Wage Act cases seeking unpaid bonuses? Are bonuses be considered wages under the Act?

First of all, there are two ways to read the Wage Act, both of which are logically-valid but completely different.  On the one hand, one can choose to take the reference to “wages” in the Act to be a general way of referring to the compensation of an employee.  In this view, the universe of covered wages is vast and the specific types of special compensation (vacation, holiday, and commissions) are listed only as part of a non-inclusive list.  It’s reasonable that the legislature may have listed some specific types of pay in order to head off controversies without providing an exhaustive list of what would be considered “wages.”  In fact, this is the way that the Superior Court in Juergens v. MicroGroup recently read the Act when it ruled that severance pay–mentioned nowhere in the Act–was covered as wages.  And it seems to be the majority view emerging from the case law (at least in the state courts).

The second way to read the Act is to consider “wages” to mean only the salary or hourly pay of employees, and the reference to vacation, holiday, and commissions as limited exemptions to the general rule.  What is the better reading of the statute?  The text is here if you want to give it a try.

There are a few things worth saying about Suominen.  First, courts are sometimes reluctant to allow Wage Act coverage for very highly-paid employees.  Wage Act coverage enables them to sue for three times their compensation, which in the view of some courts, is more of a windfall than an appropriate penalty.  Often these scenarios can feel more like business deals gone awry than traditional employee-employer relationships.  For example, Suominen was seeking more than $1 million in damages from a share of the “promote” of several real estate development deal.  What is a  “promote”?  It goes right to the heart of why Suominen lost.

A promote is a term of art in the real estate development world.  It’s a manner of compensating promoters of development projects beyond their return on equity (if they invested cash in the deal) and for their personal services in managing the project.  The promote is meant to reward a general partner for his or her entrepreneurial role in a project.  A general partner must often bring a Promethean-level of effort and resourcefulness to a project to make it succeed, and it makes sense for everybody, including the limited partners, to incentivize this.  Moreover, a general partner will often have real skin in the game,  like a personal guarantee of project debt or even a mortgage on his home to get the loan for the deal. (By the way, this is a big cause of bankruptcies when a business project fails).

In this case, Suominen was an employee of the general partner (Goodman), the promoter of several real estate development deals.  Goodman, as general partner, had negotiated the right to a promote that was 25 percent of the equity upside after invested equity was paid back and received a 15 percent annualized return on its investment.  Since Suominen was a key part of the Goodman enterprise–as construction manager he had a big role in the projects’ success or failure–Goodman agreed to pay him about 23 percent of the promote.  It is worth noting that Suominen was making a base salary of $225,000 a year during the latter part of his employment with Goodman.

So, why does this matter?  The bottom line is that courts do not think it is fair to give an employee with a high salary and a stake in overall business profits Wage Act coverage for his incentive pay.  Thus, Suominen’s Wage Act claims failed.  Courts would rather leave employees like Suominen to their breach of contract and promissory estoppel claims, so a little judicial interpretation/activism takes place.  However, what would happen if a low-level employee was owed only $1,400 as part of a bonus compensation plan and brought suit?  Defense counsel would certainly try to use Suominen to win the case.  After all, any bonus plan can ultimately be viewed as a profit-sharing plan.

It is very likely that, however, that despite Suominen, a court would rule in favor of the hypothetical employee whose income was tied to regular sales or performance of the company, rather than to a company-level transactions.  Bonuses that are tied to sales and related metrics–and not to enterprise-level transactions–are indisputably commissions.  The “promote” in Suominen was realized on the sale of a project asset or the refinancing of project-level debt to extract equity appreciation–an entity-level transaction.  Apart from scale and the power position of the actors, this is a critical theoretical difference between Suominen and the regular employee entitled to a commission or bonus.

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