Massachusetts Court Limits Scope of Wage Act by Holding that it Does Not Apply to Profit Distributions

The Massachusetts Wage Act provides that an employer must pay triple damages to employees whom they fail to pay wages. That Act, as the name implies, only applies to wages. As a result, disputes between employers and employees frequently devolve into whether a payment was, or was not, a wage. If it’s a wage, it’s subject to the Wage Act’s triple damage penalty. If it’s not, it isn’t. Late last year, the Massachusetts Court of Appeals issued an opinion that helped explain what is and is not a wage.

UNDER MASSACHUSETTS LAW, IS MY SPECIAL PAYMENT A BONUS OR A COMMISSION? does the massachusetts wage act apply to profit sharing / distributions?

On August 8, 2005, three ophthalmologists entered into a stock agreement regarding the operation of an ophthalmology practice. That agreement contained, among other things, a provision providing that the practice’s net profits would be distributed based on each doctor’s percentage contribution to the practice’s net collections. To put it mildly, the business broke apart, with two of the partners leaving to form and join a competing business. Turbulent litigation ensued, including claims regarding unpaid profit distributions. The question before the Court was whether the profit distributions were or were not wages.

The Court began its analysis by making a few background observations:

  • wages, according to Massachusetts law, are pay from an employer to an employee and include salary, holiday pay, vacation pay, and commissions;

  • a common indicia of pay is that it is established ahead of time and paid on a regular schedule (weekly or bi-weekly);

  • pay that is discretionary (like employee bonuses) are typically not wages according to Massachusetts law;

  • the Massachusetts Wage Act covers contingent compensation in the form of commission but only if they are “definitely determined” and “due and payable” to the employee;

  • commissions, generally, are payments owed to those in the business of selling goods, services, or real estate, set typically at a percentage of the sales price; and

  • a payment based on a percentage of the business’s overall profits is not a commission.

Based upon these principles, the Court concluded that the profit distributions were not wages. The Court reached this decision because the payments were not compensation from an employer to an employee but, rather, profit distributions to shareholders related to their ownership interests, not their employment. Further, the Court stated, the profit distributions weren’t wages because they were “highly contingent” on a number of variables including the billings and revenues generated by other doctors. This, according to the Court, made the profit distributions not salary, wages, pay, or commission. Read the full opinion here.

Employment attorney Benjamin Steffans has represented numerous employees in unpaid wage and unpaid compensation claims. If you believe your employer owes you money call us today for a free consultation.

Benjamin SteffansWage and Hour, Bonus and Commission