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Employee’s commission compensation constituted ‘wages’ under Massachusetts Wage Act

By Ronald Miller, J.D.

Finding a jury could reasonably conclude that an employee’s commissions for the sale of large-scale solar installation projects were covered under the Massachusetts Wage Act, the First Circuit rejected an employer’s argument that his compensation was not a commission but more akin to profit sharing. Under the terms of a compensation plan, the employee was entitled to a 40% commission on projects that generated a profit, after the client paid the employer, and the installation was complete. Since all three contingencies were met on eight profitable solar installation projects, his compensation was “definitely determined” and “due and payable” under the Wage Act (Ellicott v. American Capital Energy, Inc., October 12, 2018, Torruella, J.).

Compensation plan. A sales employee for a solar energy company filed suit against his employer claiming violations of the Massachusetts Wage Act and breach of contract. The employer engineers and installs large-scale solar energy systems. The employee was hired in 2007 as director of business development, and was tasked with the sale of large-scale solar installations to commercial clients. He was compensated on a commission-draw basis.

In 2008, a written contract established the employee’s compensation plan. Among other provisions, it provided that he would be paid a commission of “40% of profit margin on each sale and installation to be paid within [thirty] days after the client pays ACE and installation is complete.” The compensation plan also stipulated that the sales commission “may be reasonably split with various sales support personnel by mutual agreement,” and that ACE would pay the employee a monthly draw, equal to an annual rate of $120,000, credited against his commissions.

Installation projects. From 2007 to 2012, the employee sold nine solar installation projects. The gross revenue of the employee’s installation projects exceeded $37 million, with eight of the projects generating a profit. Seven of the eight profitable installations were paid for in full more than three years before the employee filed suit. Before the district court, the parties disputed whether the employee, in fact, made the “sale” on each of the projects and how the sales commission, if any was due, should be calculated. The employee testified that the employer did not pay his earned commissions on any of the profitable projects.

Payment status. Beginning in 2010, and again in early 2011, the employee inquired about the payment status of his commissions. He was assured that the commission payments would be taken care of. In October 2011, the employer informed the employee that: (1) he should share his commissions with support staff; (2) the employer would deduct 5.6% for overhead and 1% for maintenance costs; (3) certain projects were considered “house accounts” and therefore not a sale by the employee; and (4) the employer would apply a 30% commission rate, rather than the 40% in the compensation plan. The employee did not agree to any of these additional conditions.

After the October 2011 meeting, the employee continued to work for the company and receive his monthly draw until October 2012, when the employer ceased making payments. Still the employee continued working for the company until June 2013, when his health insurance and cell phone coverage were cancelled. The employer never formally terminated his employment.

During motion practice, the district court allowed the employee’s motion in limine thereby barring the employer from introducing “extrinsic evidence to vary the unambiguous terms” of their 2008 compensation plan. At the close of evidence in a jury trial, the employer unsuccessfully moved for directed verdict on the employee’s Wage Act claim, arguing that the Wage Act did not apply to his sales commissions. The jury found the employer and its principals liable under the Wage Act. It also found the employer liable for breach of contract. The district court entered judgment in favor of the employee and awarded him $2,876,490 in damages, plus reasonable attorneys’ fees.

Applicability of Wage Act. On appeal, the employer challenged a series of rulings by the district court. Among other things, it questioned whether the employee’s compensation constituted “wages” under the Wage Act and whether the statute of limitations for his Wage Act claims was properly tolled.

Implicit in the jury’s verdict was the determination that the employee’s commissions did constitute wages. The Wage Act imposes liability on employers who fail to pay wages earned by their employees. To establish a Wage Act claim, a plaintiff must show that: (1) he was an employee under the Wage Act; (2) the compensation constitutes wages pursuant to the Wage Act; (3) the Wage Act was violated; and (4) any individual defendants were corporate officers as defined by the statute.

In this instance, the only question was whether the employee’s compensation represented “wages” under the Wage Act. Under the Wage Act, “the payment of commissions” represents wages “when the amount of such commissions, less allowable or authorized deductions, has been definitely determined and has become due and payable to such employee,” Mass. Gen. Laws ch. 149, § 148. Compensation based on commissions has been “definitely determined” when it is “arithmetically determinable.” Moreover, a commission is “due and payable” when dependent contingencies have been met and it is thus owed to the employee.

Calculation of commission. The employer claimed that the employee’s compensation was more like profit sharing, and therefore not a commission as defined by the Wage Act. The appeals court disagreed with the employer’s contention that the employee’s compensation was based on future profits and was not fixed to the installation price at the time of the sale. Rather, it observed that his compensation met the two criteria for a commission to fall squarely within the scope of the Wage Act: being “definitely determined” and becoming “due and payable.”

Here, the parties did not dispute the figures necessary to calculate the employee’s sales commissions to the dime. They stipulated to the contract, project completion, and final payment dates, along with the project revenue and direct project costs, for each of the solar installation projects sold by the employee. Further, the compensation plan entitled the employee to 40% of profit margin on each sale and installation. Thus, because the profit margin for each sale could be “arithmetically determined” from the stipulated project revenue and the direct project costs, the employee’s commissions were “definitely determined” under the Wage Act.

Second, the employee’s compensation also satisfied the Wage Act’s “due and payable” requirement. Here, all dependent contingencies for the payment of his commissions were met. The compensation plan specifically set out the contingencies the employee had to meet to earn a commission. The 2008 compensation plan required only that: (1) the project generate a profit; (2) the client pay the employer; and (3) installation be complete. Since all three contingencies were met on the eight profitable solar installation projects, his compensation was “definitely determined” and “due and payable.” Accordingly, the appeals court affirmed the judgment of the district court.