Massachusetts Wage Law Blog

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 best 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 can be cast as profit-sharing arrangements, this decision will play a large part in the defense of future Wage Act cases seeking unpaid bonuses.  What does Suominen really mean?  Should bonuses be considered wages under the Act?

There are two ways to read the Wage Act, both of which are logically-valid but completely different.  First, 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 is logical that the drafters of the legislation may have wanted to specifically address certain types of pay in order to head off foreseeable controversies without providing an exhaustive list of what would constitute “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.

The second way to read the Act is to consider “wages” to mean only the salary or hourly pay of employees.  Through this prism, the reference to vacation, holiday, and commission pay is a limited extension of the wage concept, providing an exclusive list of protected types of pay in addition to regular salary and hourly-rate pay.  What is the better reading of the statute?  The text is here if you want to give it a try.

If the statutory text doesn’t clearly resolve the issue, which it really doesn’t, we must look to a bit of context.  There are a few things worth saying about Suominen.  First, courts are reluctant to allow Wage Act coverage for highly-paid employees.  Wage Act coverage enables them to sue for three times their already-lofty 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 between sophisticated actors than traditional power-imbalanced 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.  A “promote”?

A promote is a term of art in the real estate development world.  It is a way in which promoters of real estate development projects get paid above and beyond their return on equity (if they invested cash) 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 development.  It often makes sense to everybody, including the limited partners, that this be strongly incentivized in order to maximize the chances of success.  Moreover, a general partner will often have real skin in the game,  having personally guaranteed project debt or even granted mortgages on his home to obtain project financing. (By the way, this is a big cause of bankruptcies when a business project fails).  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.  Since Suominen was a key part of the Goodman enterprise–as construction manager he had a big role to play 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 that 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 impossible to say for certain how this would work, as much will depend on the facts, but a sympathetic court could rule for the hypothetical low-level employee despite Suominen.  As of 2012, there is little intellectual purity in Wage Act cases.  In the low-level employee scenario, most courts presented with the issue would want to help the plaintiff.  However, Suominen is an Appeals Court case with precedential value.  How will they do it?  The Appeals Court interpreted the Wage Act in the first of the two previously-mentioned ways, i.e. “wages” only being salary, hourly pay, and the specific extra types of pay listed. Until the SJC holds otherwise, this hermeneutics must be respected by plaintiff’s counsel.  So, a plaintiff would be best served to argue that any smaller-scale profit-sharing arrangements are simply commissions by another name.   In other words, plaintiffs should argue that bonuses come in through the “commissions” door and not via a general concept of “wages.”

Bonuses that are tied to sales are essentially commissions.  They are based on periodic sales–a distinction important to the Appeals Court–and not to enterprise-level transactions.  The “promote” in Suominen was not realized as a result of sales per se, but as a result of entity-level liquidity events, like the sale of a project asset or the refinancing of project-level debt to extract equity appreciation.  Apart from scale and the power position of the actors, that is the critical theoretical difference between Suominen and the low-level employee scenario.  Casting the low-level employee bonus case in this manner will allow the court to do exactly what it likely will want to do: give the low-level employee a break while meaningfully distinguishing Suominen.  A court will be able to find that an unpaid bonus is the same in kind as a commission (or comes within the penumbra of what constitutes a commission) without adopting an overall interpretation of the Wage Act that differs from the Appeals Court in Suominen.  The likelihood of this happening, however, depends on the facts of the case, including how much is at stake and the nature of the contingencies giving rise to the incentive pay rights.

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, attorney’s 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 is 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, in 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 a profit-sharing arrangements (though varying widely in scale), I expect this case will be utilized by defendants seeking to avoid Wage Act liability for unpaid bonuses.

Timing issues will continue 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.