Massachusetts High Court Affirms: Retention Bonuses Are Not Wages

Massachusetts holds employers to a standard of strict liability for late payments under the Act, but only when those payments are so defined as wages. The SJC’s decision confirms that retention bonuses, when structured as additional, contingent compensation for commitments beyond ordinary job duties, do not constitute “wages” under the Act, and thus are free from the strictures that would otherwise apply.

As discussed in a previous alert, when plaintiff Carlos Nunez’s employer merged with another firm shortly after Mr. Nunez began his employment, Mr. Nunez and the company entered a retention bonus agreement. Under the agreement, Mr. Nunez was “eligible to earn” a fixed-sum retention bonus in two equal sums if he remained employed through specified dates, remained in good performance standing, and maintained his regular work schedule. The second retention payment coincided with Mr. Nunez’s date of termination, but the employer paid the installment one week after — not on — that date. Mr. Nunez alleged a violation of the Wage Act for the employer’s failure to pay wages on his final day of employment.

Building on prior decisions that declined to treat additional, contingent compensation as “wages” under the Wage Act, the SJC compared retention bonuses to categories such as discretionary stock awards, severance, unused sick time, and other types of pay dependent on factors beyond an employee’s routine service for his employer. It held that, because retention bonuses are neither “made solely in exchange for the plaintiff’s labor or services” nor vacation or holiday payments, nor commissions due, such payments fall outside the scope of those enumerated benefits and compensation covered by the Act.

Despite its ruling in the employer’s favor, the SJC emphasized the importance of strict compliance with the Wage Act, as “[s]evere consequences may flow from even minor violations of the Wage Act, including potential criminal liability, treble damages, and personal civil liability against the company’s owner.”

While properly drafted retention agreements are unencumbered by such constraints, the SJC’s reasoning turned on the nature and terms of the arrangement. To avoid these pitfalls, employers should ensure that retention agreements:

• Clearly state their purpose as incentives to remain employed through specified dates.

• Describe eligibility for earning the bonus upon satisfaction of defined conditions that go beyond the provision of ordinary services.

• Identify the bonus as additional compensation separate from base salary and regular pay.

• Align payment timing with the contract’s terms rather than payroll cycles.

Employers should also consider whether a bonus is a commission by another name. Non-discretionary bonuses tied to performance may be considered a commission, which is a wage when definitely determined and due and payable, subject to trebling for an employer’s late payment under the Act.

When faced with drafting clear compensation agreements, or an employee termination involving questionable bonuses, commissions, or severance, ArentFox Schiff’s legal team is here to help. If you would like more information or need assistance, please contact a member of our Labor, Employment & OSHA team or the AFS professional who handles your matters.