Wednesday, March 16, 2016

Business Growth, Cash Flow, and the Massachusetts Wage Act: Traps for the Unwary

50% of small businesses surveyed identified hiring new employees as one of their top challenges for 2016.  In the same survey, 36% (39% of businesses with 11-50 employees) identified cash flow as one of their top challenges. 

There is an obvious tension between the need to find and retain high quality people to grow your business and the cash flow pressures you face as a small business, which creates the temptation to employ some common but legally and financially risky strategies.

Deferring compensation for key employees: this is something that many start-up companies do.  Often the key employee and the owner are friends or have some other pre-existing relationship, and agree in good faith and with the best of intentions that they will defer some part of their compensation until the company gets off the ground and becomes profitable.   However, you should know that even executive employees are subject to the Massachusetts Wage Act, which:
  1. requires timely payment of wages to all employees, including executives;
  2. imposes mandatory triple damages and payment of the employee's legal fees and costs if the employer violates the statute;
  3. expressly states that you cannot make an agreement with an employee to avoid the requirements of the Wage Act, even if the employee is sophisticated and even if the agreement is in writing;
  4. allows an aggrieved employee to recover not only from the employing company, but from officers and certain management personnel personally.

What this means is that if your company does not begin to make money before your employee(s) get tired of deferring compensation, or if your relationship with that key employee goes bad for some other reason, both your business and you personally could be subject to significant financial liability and the added burden of your own legal fees.

Some of these pitfalls can be avoided in the first place by employing a different compensation structure, which establishes a minimum base salary with additional compensation available in the form of bonuses tied to the performance of the company. 

Hiring independent contractors:  particularly if your need for staff fluctuates or is seasonal, it is tempting to bring in people to provide services as independent contractors rather than W-2 employees.  It is less expensive for the business, since you do not pay employment taxes, unemployment, or workers compensation insurance for those individuals.  You also may feel like it is a more appropriate arrangement if the employment is temporary, or if you only need that person’s services for a limited time each week and they work elsewhere on the other days.

Be very, very careful about this.  Under Massachusetts law, this arrangement is legal only under a narrow set of circumstances, and almost never legal if the services being performed are part of your core business operations.  If an employee complains about being misclassified as an independent contractor, damages are measured by what that employee would have been entitled to as a W-2 employee and, like other damages under the Wage Act, are subject to mandatory tripling.  These damages can include the amount the employee had to pay in self-employment taxes, the value of any benefits offered to others in the company who were classified as employees, and any lost opportunity to collect from unemployment or workers compensation based on their classification.   Also like other Wage Act claims, if the employee wins in court, you must pay their legal expenses and costs in addition to your own.

You can employ someone on a part time or temporary basis, and you can structure that relationship so that it is clear that they can provide services to others when they are not working for you, all while still paying them as a W-2 employee and avoiding the risk of a misclassification lawsuit.

Delaying payment of commissions:  The Wage Act applies to commissions when they are “definitely determined” and “due and payable.”  It is perfectly appropriate to structure employee compensation to be a mix of salary and commissions, so long as the employee is making at least minimum wage.  Some employers pay commissions on the closing of a sale, others on invoicing a new customer, and still others on payment by the customer.  Any of these are acceptable, so long as you have a written commission policy that specifies the event that triggers a commission obligation. Without such a policy, the default position is that commissions are due on the closing of a sale, and if you hold commission payments until the customer pays you could face a Wage Act claim for unpaid commissions.

Creating a bonus structure that operates as a commission:  when considering ways to structure compensation, you should be aware that there is a critical difference between a “bonus” plan and a “commission” plan, namely, the employee’s entitlement to payment and the applicability of the Wage Act.  A commission is a form of wages, as described above, while a bonus is generally discretionary.  If you call your plan a “bonus,” for example, but it is calculated according to sales an employee makes, it is in all likelihood actually a commission.   There is an important balance to strike here: if you are seeking to attract top talent, you may do better with a compensation plan that is concrete and tied to a mathematical formula than you would with a lower salary and a discretionary bonus, as the prospective employee will discount the value of the bonus because it is uncertain.  You can almost have it both ways, however, if you structure your bonus plan to be tied to the revenue or profitability of the business as a whole.

These are some of the traps for the unwary small business person that lie in the Massachusetts Wage Act, and we have seen many very well intentioned employers fall into them.  If you need to employ non-traditional compensation strategies in order to bring in new employees and manage cash flow, a consultation with an experienced employment lawyer is well worth the cost.

+slnlaw LLC 

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