It is an entrepreneur’s nightmare.  The company you struggled to create goes out of business due to a lack of financing.  As the company goes under, the employees sue.  Out of money, the company does not defend itself in court and a multi-million dollar default judgment gets entered against it.  When the company can’t pay the judgment, the former employees sue you individually.  They argue that the company’s failure to pay the “back pay” judgment constitutes a violation of the Massachusetts Wage Act, M.G.L. c. 149, § 148, which imposes individual liability on certain corporate officers.  The employees now seek to hold you individually liable for the whole judgment, plus treble damages and attorneys’ fees. 

Thankfully, in the recent case of Calixto v. Coughlin, the Massachusetts Supreme Judicial Court made this nightmare scenario less likely by holding that back pay damages awarded under the federal Worker Adjustment and Retraining Notification Act (“WARN”) are not wages under the Massachusetts Wage Act.

Background

The Calixto story began on January 14, 2014, when ISIS Parenting, Inc. informed its employees – without any prior notice – that it was shutting down and terminating their employment immediately.  In response, a group of employees filed a putative class action, on behalf of the Company’s over 200 employees, claiming that the Company’s actions violated the notice requirements of WARN.

Generally speaking, WARN requires employers with at least one hundred employees to provide those employees at least 60 days’ written notice of a planting closing or mass layoff.  Employers that violate WARN are liable for, among other things, “back pay,” i.e., wages that the employees would have earned had they worked during the 60-day notice period.

The Company did not defend against the suit.  As a result, the federal district court entered a default judgment and ordered the Company to pay the employees almost two million dollars in back pay.

When the employees were unable to collect the judgment from the Company (which was insolvent), they sued the Company’s officers under the Wage Act on a class-action basis.  Under the Wage Act, employees who are not paid wages on a timely basis may sue their employer and, if successful, are entitled to recover treble damages and attorneys’ fees.  Significantly, the Wage Act defines the term “employer” to include “the president and treasurer of [the] corporation and any officers or agents having the management of such corporation.”  Relying on case law from other contexts, the employees argued that the back pay award constituted wages under the Wage Act and that the individual defendants were liable.   

The Supreme Judicial Court’s Decision

After the trial court judge dismissed the case for failure to state a claim, the plaintiffs filed an appeal.  The Supreme Judicial Court, the highest appellate court in Massachusetts, affirmed that decision.

On appeal, the former employees argued that the “back pay” award issued by the federal district court for the violation of WARN constituted wages under the Wage Act.  In support of their argument, they cited cases in which federal bankruptcy courts have categorized WARN damages as wages for purposes of bankruptcy creditor priority.

In a decision issued on December 28, 2018, the Court unanimously rejected that argument.  After reviewing the language of the Wage Act, the Court noted that the statute is applicable only if an employer fails to pay “wages earned” by virtue of work performed by an employee.  Thus, to establish liability under the Wage Act, the employee must have actually completed the labor required of him or her.

In this case, however, the back pay award was “not for work that has actually been performed but for work that would have been performed had the sixty days’ notice” required by WARN been provided to the Company’s employees.  Thus, the back pay award was not earned wages under the Wage Act.  As the Court explained, the “work must have been actually performed and wage payments must be presently due to trigger” liability under the Wage Act.  Therefore, the Supreme Judicial Court upheld dismissal of the employees’ lawsuit.

Practical Ramifications

On its face, this decision is very narrow.  The Supreme Judicial Court simply held that an award of back pay under WARN does not constitute wages earned under the Wage Act.  On the other hand, the decision is quite significant.

First, the Supreme Judicial Court largely closed the door on future Wage Act claims arising out of back pay awards under other statutes.  The Court noted that many employment-related statutes provide for awards of back pay.  In so doing, the Court took pains to state that “back pay is not the same as wages earned but not paid under the Wage Act, which has its own particular and precise requirements.”  Thus, this decision should put to bed the nightmare scenario discussed earlier, regardless of the underlying basis for an employee’s claim.  Indeed, had it ruled in favor of the employees, the Court likely would have encouraged similar lawsuits arising out of statutes other than WARN. 

Second, the Calixto decision demonstrates once again that not everything is a wage.  Because the Wage Act provides for mandatory awards of treble damages and attorneys’ fees, plaintiffs often seek to expand its scope to include all sorts of payments that are not directly tied to work performed by an employee.  In this case, the Supreme Judicial Court reiterated that earned wages, within the meaning of the Wage Act, are limited to payments for work that has actually been performed and that are “presently – not just prospectively or potentially – due to be paid by the employer.”

Third and finally, the Calixto decision serves as a reminder to Massachusetts employers regarding their obligations under both WARN and the Wage Act.  WARN is a complex statute whose notice requirements may be triggered whenever 50 or more employees are laid off or terminated. Under the Wage Act, employees who resign must be paid their wages in full on the next regular pay day, and employees discharged must be paid their wages in full on the day of discharge.  Employers that violate these obligations may be liable for mandatory awards of treble damages and attorneys’ fees.

Employers should work with experienced employment counsel if they have questions about how to comply with their obligations under either of these laws.