In an employment decision issued today by the Massachusetts Appeals Court , O’Connor v. Kadrmas Eye Care New England, PC, et al, Nos. 18-P-177 and 178, https://www.mass.gov/files/documents/2019/10/18/d18P0177.pdf, the court analyzed whether monies owed to a one-third owner of an ophthalmology practice were “wages” such that the failure to pay those monies timely was a violation of the Massachusetts Wage Act. The owners of the practice had a stock agreement for a professional corporation that functioned similar to a partnership agreement or LLC operating agreement. Among other things, the stock agreement provided details on compensation. A dispute thereafter arose with a variety of claims on both sides. One of those claims was a Wage Act claim the plaintiff asserted based on the practice’s failure to make profit distributions.
The Appeals Court held that the owners were not employees under the stock agreement and “it is clear that the distributions under paragraph V(a) of the stock agreement are not ‘wages’ within the scope of the Wage Act. Most fundamentally, they are not compensation from an employer to an employee, but rather profit distributions to shareholders to which they are entitled because of their ownership interest in the corporation, not because of their employment.”
The court’s reasoning that the compensation was not a commission (which is entitled to protection under the Wage Act) appears to be limited to 1) the observation that there was a “highly contingent nature of the profit distributions, which depended on a number of variables, including the billing and revenue generated by other doctors” and 2) a citation to Suominen v. Goodman Indus. Equities Mgmt. Group, LLC, 78 Mass. App. Ct. 723, 737 (2011), which stated that “[t]he term ‘commission’ is commonly understood to refer to compensation owed to those in the business of selling goods, services, or real estate, set typically as a percentage of the sales price.”
“In sum,” the court held, “the profit distributions are not salary, pay, or commissions.”
This conclusion, however, may not be correct from either a legal or public policy standpoint. First, the plaintiff worked for the PC even though he had an ownership stake (as do many employees with stock options). Second, the monies owed are no longer contingent once they are “definitely determined” under the formula in the stock agreement and should be “due and payable” in accordance with the stock agreement and the PC’s ordinary practice, which was “to cut checks to the three shareholders for the final quarterly distribution.” Finally, monies owed under the stock agreement should meet the Suominen definition (if that’s even a complete definition of “commissions”) because the plaintiff was in the business of providing eye-related medical services and the formula for compensation in the stock agreement was based on a percentage of “all amounts collected by the Corporation related to services provided by the Shareholder.”
Further, it’s a poor public policy to block workers who have some equity ownership (but not a controlling interest) from being able to use the Wage Act’s powerful tools of treble damages and the ability to shift attorney fees to controlling owners who wrongfully refuse to pay profit sharing compensation. Why? Because without the existence of those disincentives for the controlling owners to engage in wrongful conduct, wrongful conduct can occur with less risk. Which means it can happen more frequently. As a former judge on the Massachusetts Superior court, Judge Sikora, elegantly put it about a comparable statute containing multiple damages and fee shifting in cases of unfair or deceptive acts or practices in commerce—but generally not “intraparty” disputes between employer and employee—“Competition between a former employer and former employee often carries with it motivations generated by the former relationship. The old employer may experience feelings of betrayal; and the old employee a sense of oppression. Whatever their merits, those feelings are more likely to cause tactics of unfairness or deception than would competition between strangers. The contempt and hostility born from the one-time familiarity raises the temptation and risk for the very conduct prohibited by the statute. The old relation increases, not decreases, the probable need for 93A remedies.” Prof’l Staffing Grp., Inc. v. Champigny, No. 04852A, 2004 WL 3120093, at *3 (Mass. Super. Nov. 18, 2004).