Wage Forfeiture and Valid Set-Offs in Massachusetts

Generally, any contractual provision that requires an employee to forfeit earned wages is a “special contract” prohibited by the Massachusetts Wage Act, M.G.L. c. 149, § 148. As the Attorney General has put it, “an employer may not enter into an agreement with an employee under which the employee forfeits earned wages.” See An Advisory from the Attorney General’s Fair Labor Division on Vacation Policies, 99/1. The concept of wage forfeiture often, but not always, arises along with the concept of set-off. As the Wage Act allows a “valid set-off” to be deducted from wages, when an employer has a potential wage set-off, it will usually assert it as a defense in a wage case. This usually doesn’t work. As an example, we once had a school system defend the docking of teachers’ pay due to their inability to get students to return all their textbooks. This was not a valid set-off. Notably, the Massachusetts Supreme Judicial Court recently held in Camara v. Attorney General, 458 Mass. 756 (2011) that a set-off for damage caused to the property by garbage collectors was not permissable under the Wage Act. The employer in that case had created a procedure in which it would be the sole judge of the fault and damages caused by a garbage collector in, say, knocking over a customer’s mailbox. As the court put it:

An arrangement whereby [the employer] serves as the sole arbiter, making a unilateral assessment of liability as well as amount of damages with no role for an independent decision maker, much less a court, and, apparently, not even an opportunity for an employee to challenge the result within the company, does not amount to “a clear and established debt owed to the employer by the employee.” The option afforded [the employer]’s employees to choose “voluntarily” to accept either wage deductions or discipline offers them only unpalatable choices. This procedure does not come close to providing an employee the protections granted a defendant in a formal negligence action.

Id. at 763-4.

So, the circumstances in which an employer can involuntarily deduct wages are narrow. In general, it is only permissible when there is “clear and established” debt to the employer; when the matter is subject to potential dispute–as in the garbage case–the debt is not clear and established. However, there is another situation in which compensation can be taken from an employee: when that compensation isn’t really earned in the first place or, put another was, when the vesting in the right to compensation is subject to contingencies that the employee must fulfill in order to earn the wage in the first place. That’s what the SJC held in another case related to restricted stock grants.

In Weems v. Citigroup Inc., 453 Mass. 147 (2009), the basic story was that Citigroup either granted restricted stock as a bonus or employees could buy it via a payroll deduction. Restricted stock is a type of stock that you don’t actually vest to full ownership unless you stay employed. Typically, restricted stock vests at intervals over several years, and the employee forfeits any unvested restricted stock when their employment ends. In Weems the SJC held that this was permissible.

First of all, Weems was, at least in part, a results-driven opinion due to the peculiar nature of restricted stock. Rolling vesting schedules are a common and well-established way of rewarding employees for staying in their jobs. The IRS has special rules that make this type of compensation feasible. No tax is due on grants of restricted stock (unless the employee makes a special election). Tax liability only accrues when the stock vests. However, the IRS requires that there be a “substantial risk of forfeiture” of the stock for this tax treatment to be allowed. (Here’s a PDF discussing the taxation of restricted stock). If the SJC in Weems had held that the restricted stock was already earned for past services when granted instead of when it vested, any forfeiture of it would have violated the Wage Act. However, this would have also removed any substantial risk of forfeiture in all restricted stock in Massachusetts. Besides creating a major change in the long-standing ability of employers to use restricted stock to incentivize employees, it would have rendered all unvested restricted stock in Massachusetts immediately taxable as ordinary income as of the date of the decision. The SJC made several references to the tax issue, and this was a radical consequence they were clearly trying to avoid.

We shall further assume for purposes of answering the certified question that [the plan] is designed to comply with the provisions of Federal tax law that require some element of forfeiture for tax deferred plans.

Id. at 155.

Still, the SJC had to find an intellectually-defensible basis to find that the unvested restricted stock was subject to forfeiture. As I mentioned above, there were two kinds of restricted stock at issue: the kind that was given as a bonus and the kind that was purchased by employees via payroll deductions. In Weems, the parties stipulated to the fact that the bonus stock was given in an entirely discretionary manner.

The operative fact here is that bonus awards under these programs are discretionary, not because they are labeled bonuses, but because the employers are, apparently, under no obligation to award them.

Id. at 153-4.
This meant that the plaintiffs did not have Wage Act rights in the restricted stock before it was granted. However, this wasn’t really the point of the case: No one really contends that a purely discretionary bonus is subject to Wage Act coverage before it is decided upon by the employer.

The real question in the case was whether the bonus stock could be taken back before it vested. As the court put it:

[A]n employee who received such an award would receive the full benefit of the stock (i.e., the restriction would be lifted and the stock would vest fully) only if the employee remained with the company for the defined period after the award. The only thing they “earned” as a result of their bonus was stock that had limited value to them until it vested.

Id. at 154.
So the bottom line is that the court allowed the forfeiture of the restricted stock because it was a special type of compensation earned only by continued employment. This is one interpretation. One might also argue that Weems created a legal fiction to achieve a desired result, i.e. that the bonus restricted stock had only no real value and, therefore, could be forfeited without a violation of the Wage Act?

The bottom line is that employers will try to use Weems to excuse the forfeiture of bonuses and commissions after they are earned when a condition subsequent to their payment exists under employer policies. I don’t think Weems requires this result. The line between a bonus and a commission is also often hazy, and the status of bonuses under the Wage Act isn’t exactly clear-cut. However, it is my opinion that despite Weems, once a commission (or “bonus”) is calculable and due and payable that a condition subsequent to its payment will be held to be a special contract in contravention of the Wage Act.

(The court had an easier time quickly disposing of the second type of stock, that kind that was purchased by employees. The court also held that M.G.L. c. 154, s. 8 specifically removed employee stock purchase plans from the protections of the Wage Act.)

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Introductory Post from a Massachusetts Wage Lawyer

I’m a little late with this introductory post, but now that this page has garnered a bit of readership, I figured I would take a moment to introduce myself.

My name is Nicholas Ortiz.  I graduated from Vanderbilt University and Boston University School of Law and took my first wage case in 2003, my first full year of law practice.  My first wage client was a man who had been worked relentlessly by his employer in the records room of a hospital.  That was fine, but there came a point when “get the job done” became “get the job done, but you’re not allowed to put all of your time down on your time sheets.”  When he complained, he was let go.  After we took the case, we settled it favorably for the client by rounding up several witness statements from fellow employees.  These employees gave statements that confirmed the long hours my client worked, and these hours did not match his time cards, which the employer was contending were correct.  Most importantly, we obtained an affidavit from a long-time, retired employee with no vested interest in the case; he had first-hand knowledge, a lot of credibility, and he supported our version of events.

I think wage law practice is one of the most interesting and rewarding areas of practice these days in Massachusetts.  Defense lawyers grumble a bit about some of the more employee-friendly changes in the law (most notably, mandatory treble damages in 2008), but I suspect that they like it a little bit too, if for no other reason than that there are some really interesting issues to fight about.  On my usual side of things–the plaintiff’s side–I have the added bonus of helping people get paid what they deserve.

Here are some of those interesting issues that we’ve been dealing with in some of our recent cases.  I’ve already written about some of them elsewhere on this site.

  • What is an illegal special contract or contractual provision that wrongfully deprives an employee of his earned wages?
  • What can be deducted from wages–i.e. what is a “valid set off” under the Wage Act?
  • What sort of off-the clock work must one be paid for?
  • What are the limits of what employers can do with commissions and performance bonuses? When, if ever, can they make an employee forfeit an earned bonus or commission?
  • Independent contractor misclassification issues: what types of damages can a wrongfully-classified “independant contactor” recover?
  • Vacation pay issue.
  • Illegal tip sharing issues.
  • Overtime and exemptions.

I’ll get to more of these topics as this site progresses.  Thanks for reading!

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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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