Reliance on MA Case Finding That Compensation Contingent on Funding is Not Owed is Risky

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Historically, Massachusetts courts routinely ruled that it was a violation of  the Massachusetts Wage Act to fail to pay an employee who had been promised payment for her work only after the employer received sufficient funding. For example, in Stanton v. Lighthouse Financial Services, Inc., U.S. District Court Judge Nancy Gertner found not only once, but twice, that John Stanton was an employee under the Wage Act, was entitled to payment of deferred compensation under his employment contract and confirmed that there was no carve out from the Wage Act’s requirements for startups. In reaching her decision, Judge Gertner reasoned that a deferred compensation agreement where the compensation was forfeited violated the Wage Act provision prohibiting the entering into of a special contract to avoid Wage Act obligations. Since Stanton, a number of Massachusetts state and federal court cases have ruled that compensation contingent upon a company’s receiving certain levels of funding were wages that were required to be paid in accordance with the Wage Act and required such wages to be paid promptly and upon termination of employment – even if funding had not then occurred.

In what could be viewed as a new twist, Superior Court Judge Dennis Curran determined that Micha Barnum was not entitled to payment of compensation contingent of company funding at the time he was terminated by Tubifi, Inc. because he was not an employee of the company. Judge Curran relied on Barnum’s offer letter, which offered Barnum the role of “Vice President of Business Development,” but made the offer “entirely conditional upon the business being able to raise sufficient investment capital to launch and develop its business model.”

Importantly, the offer letter also stated:

By signing this offer letter, you agree that you will have no claim against [Tubifi] for compensation or reimbursement of expenses in the event that, in view of the Founders. The [sic] amount of capital raised is insufficient to support the position of Vice President of Business development on an on-going basis.

Judge Curran decided that “the language could not be clearer,” and since Barnum had “graduated from MIT’s prestigious Sloan School and previously worked in the banking industry,” he knew or should have known that he was joining a risky start-up venture and understood that “[p]ayment would be wholly discretionary at the decision of the corporation until sufficient capital had been raised.” The fact that Tubifi had paid him $5,000 a month for over one year had no impact on Judge Curran’s decision that Barnum was, in essence, volunteering his time to Tubifi.

Notwithstanding the appeal of Judge Curran’s simple reliance on the language of the offer letter, here’s why it may be risky to follow this decision: First, Judge Curran analyzed the issue in the context of  Barnum’s request for a temporary restraining order, seeking to prevent Tubifi from dispersing assets and attaching those assets. Thus, Judge Curran’s one and one-half page decision provides very little analysis and does not even address other case law (such as Stanton), which appears to contradict his decision.

Second, because the request for a restraining order was presented on an ex parte basis, there were no arguments made to the Court that the compensation at issue was not a discretionary bonus, completely contingent upon certain thresholds. Further, no mention was made as to how Tubifi legally could allow Barnum to suffer or permit to work for them on a completely voluntary basis.  Indeed, any such scenario seemingly would be a clear violation of the Fair Labor Standards Act, if not of the Massachusetts wage laws.

Accordingly, companies and in-house counsel, especially those of funding-deprived start-ups, should exercise significant caution in relying on Judge Curran’s decision in Barnum to make compensation contingent upon funding, and especially to defer compensation until after achievement of funding. If funding is scarce, companies should consider paying at least minimum wage (and overtime) and can consider rewarding a worker for taking a risk in a company through discretionary or contingent bonuses instead.

Topics:  Corporate Counsel, Employer Liability Issues, Funding, Wage and Hour, Wages

Published In: Business Organization Updates, General Business Updates, Labor & Employment Updates

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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