MA Wage Act doesn’t cover profit-based incentive pay, judge rules
A recent decision from a federal court in Massachusetts reinforces the narrow scope of the Massachusetts Wage Act as it applies to incentive pay. In Noreke v. Gideon Taylor Consulting, LLC, decided August 14, the court concluded that incentive payments based on division-wide profits were not “commissions” under the Act, even though the payments were non-discretionary and calculated using a fixed formula.
Plaintiff Holger Noreke, who was Managing Director of one of his employer’s divisions, received a base salary plus incentive payments under a so-called “commission plan.” The plan provided for payments to Mr. Noreke based on the net income of his division and set specific thresholds that automatically triggered periodic payments to him depending on the division’s profitability.
Mr. Noreke’s employment was terminated and he sued, alleging that expenses had been misallocated to reduce the division’s apparent net income, which in turn reduced his payouts under the plan. He asserted a number of claims, including a claim under the Massachusetts Wage Act, on the theory that these amounts were unpaid “commissions” and that he was therefore entitled to treble damages and attorneys’ fees.
The court disagreed. Although the company had labeled the payments as “commissions,” the court noted that the characterization was not dispositive. Looking to the substance of the arrangement, the court described a consistent line of cases holding that the Wage Act definition of “wages” does not include profit-sharing that is not based on an individual’s sales efforts. The court then determined that the payments at issue were in fact profit-sharing, tied to the overall performance of a division rather than to Mr. Noreke’s individual sales or revenue-generating activity. Therefore, the payments did not qualify as “wages” under the Wage Act.
For employers with Massachusetts employees, the decision highlights an important distinction. The Wage Act applies to wages, salary, vacation and holiday pay, and “commissions” when they are “definitely determined” and “due and payable.” However, Massachusetts courts consistently hold that a payment is not a “commission” at all – and therefore not covered by the Wage Act – if it is not based on an employee’s own sales or revenue. Thus, bonuses and incentive payments that are linked to company-wide or divisional profitability are not “wages” within the meaning of the Act, even if those payments are mandatory and formula-based.
Employers who structure incentive pay based on profit metrics rather than individual sales may reduce their exposure to Wage Act liability, including the risk of treble damages and attorneys’ fees. Of course, an employer may still be liable under contract-based theories if, for example, it fails to pay consistent with a plan such as the one at issue in this case, or if it terminates an employee in bad faith to avoid making a promised payment.
Employers seeking to design executive compensation programs for Massachusetts employees should take this decision into account. Linking incentive pay to profitability metrics, and clearly distinguishing such arrangements from sales commissions, can tie executive pay to business performance while limiting the employer’s potential exposure under the Wage Act.
