In a recent decision that will be of interest for any company struggling with executive compensation and other financial burdens, a Massachusetts federal court has held that a start-up company violated the Massachusetts Wage Act by not paying a salary to its president and co-founder, even though the executive had signed an employment agreement giving the company the right to defer his salary. In Stanton v. Lighthouse Financial Services, Inc, the Court found that under the Wage Act, the president and co-founder was an employee, the salary deferred under the employment agreement constituted “wages,” and the deferral provision in the employment agreement was void as a matter of law.
John Stanton, the co-founder of Lighthouse Financial Services, Inc., a start-up company, had entered into an employment agreement to serve as Lighthouse’s president for a period of one year. The agreement contained a deferral provision that permitted Lighthouse to defer payment of Stanton’s $144,000 annual base salary for the first year, provided that Stanton was to be paid the salary before any profits were distributed. Months after the agreement had expired, Lighthouse had not yet paid Stanton any base salary or other compensation.
Stanton filed a complaint for nonpayment of wages under the Wage Act, which provides that employers must pay all wages to employees on a weekly or bi-weekly basis, within six days of the close of the pay period in which the wages were earned. The Wage Act has potentially serious penalties for any violations, including mandatory treble damages, an award of attorneys’ fees and costs, and individual liability for officers and directors of the company that failed to pay the wages.
Executives are “Employees” and Their Salaries Constitute “Wages” Under the Wage Act
The Court first found that notwithstanding his senior position as a co-founder of Lighthouse, Stanton was an employee for purposes of the Wage Act, which defines employees as individuals “performing any service.” The Court rejected Lighthouse’s argument that one who qualifies as an “employer” under the Wage Act (defined to include any “officer or agent having the management of such corporation”) may not also claim protection as an employee. The Court emphasized that “a person [could] play different roles within the same institution” and rejected any reading of the Wage Act that would limit its application to low-level employees.
The Court next noted that unlike in prior cases finding certain forms of executive compensation beyond the scope of the Wage Act, at issue in Stanton was a base salary. The Court distinguished base salary payments from other types of contingency-based compensation, such as commissions or bonuses, that might not be covered by the Wage Act.
Salary Deferral Agreements Are Void as a Matter of Law
The Wage Act specifically states that no employee can “exempt himself,” by means of a contract or otherwise, from the provisions of the Wage Act. Based on this statutory language, the Court held that the deferral provision in Stanton’s employment agreement was void as a matter of law. Even though Stanton had previously agreed to the provision, the Court refused to hold him to his bargain based on the Wage Act’s language and its public policy underpinnings.
What This Means
Stanton clarifies that employers that do not pay a base salary to all employees, including those occupying the most senior ranks, risk liability under the Wage Act. This is true even where the senior employee has agreed to the arrangement. However, Stanton leaves open the possibility of paying modest salaries, while providing larger amounts of compensation in the form of bonuses and other contingency payments that do not constitute “wages” within the meaning of the Wage Act. For companies teetering on the brink of financial viability, these arrangements can be crucial, but must be drafted carefully to achieve compliance with the Wage Act and other laws. You are encouraged to contact any of the listed attorneys below for assistance in designing, drafting and implementing such arrangements, or with any other questions.