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? Should 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 deals. 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, 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 transaction. 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.