Hemenway & Barnes AUTHORED LITERATURE

Wage Act Brings Loss for One Tech Employer,
Win for Another
Mass High Tech
August 12-18, 2002

By Joseph L. Bierwirth Jr.

When an employee is fired, Massachusetts law requires the company to pay the employee on the date of termination all wages and benefits due. If the company fails to do this immediately, the discharged employee can sue under the Wage Act and recover triple damages and attorney's fees — a strong deterrent against unscrupulous business owners who might otherwise wrongfully withhold compensation.

However, companies and employees sometimes honestly disagree about what is due. How should tech employers avoid paying more than they owe without opening themselves up to Wage Act claims and penalties?

Two courts have recently been asked to provide guidance on this question in cases involving the high tech industry. One case was related to a claim for commissions; the other involved stock options.

In the first case, VA Software Corp., formerly known as VA Linux Systems, fired a salesman. He had been making a salary of $90,000, plus the opportunity for commissions. The salesman sued under the Wage Act when the company refused to pay him all the commissions he claimed to have earned.

Historically, courts have held that regular, periodic commissions, such as those earned in the retail sales business, can qualify as wages under the act if the commissions in essence serve as wage equivalents. Thus, employees who depend on commissions as their usual and ordinary wages are not deprived of their last wages when they are fired.

Courts have also held that the Wage Act applies only to payments of commissions when the amount of the commissions, less allowable deductions, has been definitely determined and is thus absolutely due and payable. In other words, commissions that are dependent on contingencies, such as meeting regional sales quotas, while may be ultimately due to a discharged employee, are not wages due immediately upon termination under the Wage Act.

In the VA Software case, the salesman's Wage Act claim was not appropriate because his commissions were contingent on the attainment of certain sales goals and therefore were not definitely determined.

In addition, because the Wage Act was enacted to protect wage earning workers and commissioned employees who rely on payment of regular commissions, the court declined to extend the reach of the Wage Act to protect an employee who could rely on the "healthy salary" of $90,000. As a result of the court's decision on the employer's motion to dismiss, the company will not have to worry about ultimately being held liable for triple damages and attorneys' fees while the litigation proceeds on the proper calculation of commissions due.

The other recent case that tested the Wage Act involved Nortel Networks. Nortel was sued by a former hardware engineer who claimed entitlement to stock options. The engineer's multi-count complaint contained a claim under the Wage Act that Nortel moved to dismiss. Nortel argued that stock options are a form of contingent rather than assured compensation. The engineer responded that the only recovery he sought was the value of the options vested at the time of his termination from employment and that, because the options had vested, they were no longer contingent. Nortel disagreed and argued that the options should still fall outside the Wage Act because they are not ordinary wages but, like a baseball player's signing bonus, represent compensation for future, anticipated performance.

The judge decided to defer on these issues. He cited in his decision the lack of any authoritative guidance on the issue from the Massachusetts appellate courts. As a result, until this case or another like it is resolved, companies issuing stock options are uncertain whether this aspect of a compensation package counts as wages due immediately on discharge under the Wage Act.

While both of these cases were decided at the trial court level and thus do not have the binding impact of appellate law, the decisions should serve a cautionary warning to all tech companies. Faced with the obligation under the law to pay all wages due immediately upon discharge, a company should give careful consideration to the tricky question of what counts as wages.

Given the creative compensation arrangements prevalent in the tech industry, these issues are certain to be the subject of future litigation and tech companies should be sure to keep themselves apprised of the latest developments.

Joseph L. Bierwirth Jr. is a litigator at Hemenway & Barnes in Boston. His practice includes the representation of compa-nies in business and employment-related disputes. He can be reached at jbierwirth@hembar.com.

© Mass Tech Communications, Inc., August 12, 2002. Reprinted with permission. All rights reserved.