Risks to the Employer of Deferring Wages
BY MICHAEL J. WOLFSON
It is not uncommon for a struggling business to consider asking employees, particularly members of management, to defer some of their wages until times are better. Yet the Massachusetts Superior Court ruled recently that, even if an employee agrees in writing to the deferral, and even if the company eventually pays the deferred wages in full, the employee may still recover damages from the company.
In Dobin v. CIOview Corporation, Dobin, a manager at a small consulting company that found itself in a financial bind agreed in early 2000 to defer a portion of her wages until the company's cash situation improved. Later that year, the company terminated Ms. Dobin's employment and paid her all of the deferred wages; she then filed a complaint against the company charging, among other things, violation of the Massachusetts Wage Act requirement that wages be paid within 6 days after the applicable pay period.
Questions Raised by Dobin
The Dobin Rulings:
- Are the salaries of highly-paid executives protected "wages" under the Wage Act?
- Was Ms. Dobin's deferred salary still "wages" even though payment was contingent on the company's future performance?
- Did the requirement of paying wages within six days still apply even after Ms. Dobin agreed to defer those payments?
- The Wage Act protects all wages, including those of highly-paid, salaried executive, administrative and professional employees.
- Salary payments that are contingent upon events other than the employee's job performance are not "wages." For example, a bonus payment conditioned upon working a certain number of days or upon the company's meeting performance targets would not be a "wage." Ms. Dobin's salary, however, was earned through her performance of her job and was therefore a "wage"-that its payment was deferred did not change this characterization.
- The Wage Act prohibits all agreements to defer wages (except deferrals pursuant to deferred compensation plans and similar statutorily created vehicles) even were the agreement to be entirely voluntary and even essential to keeping the company going.
The Dobin Damages
The Wage Act provides for treble damages plus attorneys' fees and litigation costs to an employee in the event of improperly deferred wages; the company is liable for these even if it subsequently pays the deferred wages. Thus, if a payment is made after the employee files a Wage Act complaint, the company is liable for another two times the deferred wages (for a total of triple the deferred amount) plus treble interest on the amount deferred.
What did Ms. Dobin recover? Her employer was fortunate to be found to have paid Dobin her deferred wages before she filed suit. The court thus awarded damages of interest (at the 12% per annum statutory level) on her delayed wages times three plus, regardless of when the late wage was received, her attorneys' fees and litigation costs.
So what should a company that finds itself in desperate straits-perhaps on the verge of closure-do? Should the company still follow the temptation to seek or require wage deferrals from employees? Doing will certainly create the risk of a Wage Act claim and its attendant multiple damages. Moreover "[t]he president and treasurer of a corporation and any officers or agents having the management of such corporation" are deemed "employers" who are subject to personal liability for all damages, and also to the possibility of criminal liability with potential fines as high as $50,000 and imprisonment for up to two years.,/p>
What can the cash-strapped company do in these situations? Unfortunately, there are few attractive options involving employees. As the court suggested in Dobin, a company may terminate employees, and try to hire replacements at low wages-if suitable personnel can be found). Or, if done very carefully, it may be possible for the company to enter into a written agreement to reduce the employees' wages for a period of time, to be followed by a wage increase and/or bonus based on the company's future financial success. Other employee-related cash conservation measures may include requiring employees to take unpaid leave or temporary office closings.
Comment: Be alert to the risks of deferring employee wages, even if agreed to in writing; the potential risks to the company and its top officers may far exceed the benefits of the deferral.
© ASSOCIATION OF INDEPENDENT GENERAL COUNSEL 2004; (all rights reserved). This article is not intended as legal advice. Consult a qualified attorney for assistance concerning a specific issue or problem.