Bonuses and Commissions under the Wage Act

It matters a great deal whether a certain type of pay is covered by the Massachusetts Weekly Payment of Wages Act (“Wage Act”). If a type of unpaid compensation is covered by the Wage Act, an employee is entitled to three times the unpaid amount, attorneys’ fees and costs. Commissions and bonuses have been a big source of controversy, but the Massachusetts courts have recently begun to rule more consistently in employees’ favor.

In Okerman v. VA Software Corp., 69 Mass. App. Ct. 771 (2007), the panel held that commissions were covered by the Wage Act as long as they were “definitely determined” and “due and payable,” as set forth in the plain language of the statute. The panel further tightened the noose on employers not paying wages, limiting their ability to be overly clever with commission calculations. The panel made it clear that the “definitely determined” requirement was satisfied as long as commissions were “arithmetically determinable.” Notwithstanding this decision, commissions will continue to be a fruitful area of controversy due to the many scenarios that can arise in the context. For example, it is not entirely settled whether an employee can be deprived of commission wages that are payable only upon a contingency (such as the company collecting on a sales invoice) that only occurs after the employee has quit or been terminated. If an employee negotiated a purchase order and serviced a sale but was terminated while the company was waiting to be paid, can the employee be terminated and the company retain the commission? This is not a settled question. Depending on the intent of the employer and circumstances, the former employee will have a claim under the implied covenant of good faith and fair dealing, but a common law case such as that lacks something critical, i.e. the fee-shifting and multiple damage provision strongly incentivizing Wage Act claims.

In the aftermath of the Okerman decision, there was a tendency on the part of some employers to re-cast commissions as bonuses in order to evade the requirements of the Wage Act. That missed the mark. Although there is no recent reported case in Massachusetts specifically holding that a bonus is covered by the Wage Act, the prediction of most wage lawyers is that the courts will find coverage. The Massachusetts Superior Court in 2011 in Juergens v. MicroGroup held that the Wage Act even covered severance pay. This is a controversial opinion, but it recognized the liberal scope of wages in the aftermath of the last seminal SJC case on the issue, Wiedmann v. Bradford Group, Inc., 444 Mass. 698 (2005). Commissions are explicitly included in the Wage Act coverage. When bonus pay is based on definable metrics, it shares much in common with commission compensation. In fact, bonuses are usually tied to sales, often of a business unit or entire company. When this is the case, a bonus is just as arithmetically determinable as a commission, and it constitutes part of the employee’s total expected pay. It would make little sense to treat mathematically calculable incentive pay differently based on the name given to it.

However, a Massachusetts Appeals Court in 2011 decided a Wage Act case that will be used by employers to claim that bonus pay is excluded from the Act. In the case of Suominen v. Goodman Industrial Equities, 78 Mass. App. Ct. 723 (2011), the plaintiff was a former construction manager of a small real estate development entity and was promised a share of “overall profits generated by the development efforts.” The plaintiff had argued that this compensation was a commission under the Wage Act. The panel disagreed, stating that it was, in their view, different than a typical sales commission because it was a “profit-sharing arrangement.” Since most bonuses can be cast as profit-sharing arrangements (though varying widely in scale), I expect defendants will seek to use this case to avoid Wage Act liability for unpaid bonuses. However, Suominen will likely be an aberration: it involved compensation based on an entity-level transaction. Sales commissions and performance bonuses are normally based on the sales of a business, and not a sale of the business itself.

Timing issues will continue to complicate bonus and commission cases. I expect to see more litigation on the issue of when an employee earns incentive pay and when an employer can evade payment by claiming funds are not due and payable until after the employee is terminated.