I. INTRODUCTION
This case involves a suit for unpaid wages by a company president against the startup he founded and its CEO. The president’s contract allowed for the deferral of his wages at the discretion of the board of directors. The plaintiffs allegations sound in breach of contract, breach of fiduciary duty, and violation of the Massachusetts Weekly Wage Act (“Wage Act”). On July 8, 2008, I ruled that the plaintiff was an “employee” under the Act but denied the parties’ cross-motions for summary judgment because both the breach of contract and Wage Act claims turned on disputed factual issues: the time during which salary could be deferred, the extent to which payment was contingent on profitability, and whether the board ever voted to defer his salary. Agreeing that the salient fact is that the plaintiffs contract allowed the deferral of wages under certain conditions, whatever they may be, the parties now seek reconsideration of the Wage Act claim. The defendants have also filed a motion to amend their answer, in order to add set-off and in pari delicto defenses.
I now reaffirm my prior ruling that the plaintiff in this case is an “employee” under the Act. An individual may be an employer vis-a-vis subordinates and an employee vis-a-vis superiors. And while the Wage Act was intended to protect those who could not bargain for their salary, like lower wage earners, the language of the Act sweeps broadly. I cannot read textual exceptions that are not there. Because I also hold that the plaintiffs base salary constitutes “wages” under the statute and that an agreement to defer wages is void under the statute, I GRANT the plaintiffs motion for reconsideration and DENY that of the defendants. Further, I DENY the defendants’ motion to amend, as neither the set-off defense nor the in pari delicto doctrine apply in this case.
II. FACTS
Lighthouse Financial Services, Inc. (“Lighthouse”), a startup company specializing in payment processing services, incorporated in Massachusetts on September 4, 2002. Compl. ¶ 6 (document # 26). John Stanton, its co-founder, recruited Thomas Drunsic in the fall of 2002 to join the company as an investor. On March 28; 2003, Drunsic purchased 500 shares of Lighthouse stock at $130 per share, for a total investment of$65,000. Stanton also purchased 500 shares by investing between $30,000 and $34,000 and receiving credit for work done for Lighthouse between November 2002 and March 2003.
On April 1, 2003, with corporate counsel present, both Stanton and Drunsic signed employment contracts with Lighthouse. Stanton became the president, and Drunsic became the chief executive officer. The contracts were for a term of one year and fixed each individual’s salary at $144,000. Stanton and Drunsic signed one another’s contract on behalf of Lighthouse. Both contracts contained the following provision: “Salary for the first year may be deferred at the sole discretion of the Board of Directors and must be paid out before the distribution of any profits of the corporation.” Margolis Aff., Exs. G, H (document # 26-3). According to Drunsic, this salary deferral clause was mutually negotiated between Stanton and Drunsic, with the assistance of corporate counsel, “to recognize the fact that the company was in no position to pay those salaries until it was profitable.” Drunsic Dep. at 40 (document # 33). Stanton alleges that there was no formal record of the Board of Directors ever electing to defer salaries.
From April through June 2003, Drunsic purchased 410 additional shares of stock and became the majority shareholder, while Stanton purchased only fifty-five more shares. 1 From July 2003 through February 2004, Drunsic continued to infuse capital into Lighthouse, buying another 960 shares of stock. He began taking money out of his 401(k) account to meet the company’s basic operating expenses. Stanton bought 100 shares on August 11, 2003, but did not make any subsequent purchases. Because he had not been rer ceiving his salary, Stanton began living on money that he had borrowed.
Also in 2003, Drunsic and Stanton persuaded Steven Monticone to invest in the company. On December 5, 2003, he purchased 800 shares for $104,000.00. With this investment, Monticone supplanted Stanton as the second largest stockholder.
In February 2004, Drunsic informed Monticone and Stanton that the company was in need of more cash to pay bills. Monticone and Drunsic each purchased 200 shares on February 27, 2004. Monticone’s recollection is that Stanton was unable to purchase more shares due to his financial situation, and a discussion of his shares being diluted subsequently followed.
Monticone also remembers a meeting with Stanton and Drunsic at which Stanton stated that he needed to receive a salary soon to pay his living expenses. Drunsic likewise recalls Stanton raising this issue, most likely in February 2004. Drunsic told Stanton that the company did not have the resources to pay salaries and refused to withdraw further funds from his 401(k) to pay Stanton’s salary.
On May 12, 2004, Stanton sent an e-mail to Drunsic, Monticone, and a third person explaining that he needed several weeks off in order to tend to a family matter. Two days later, Drunsic and Monticone each purchased 100 more shares of stock.
On May 28, 2004, Lighthouse held its quarterly board of directors meeting. Drunsic, the chairman, Monticone, a director, and David Milton, another director, were all present. Stanton had received notice of the meeting but elected not to attend, as he believe he might feel “uncomfortable” there. Stanton Dep. at 174 (document # 33). During the meeting, Drunsic proposed that the company create the position of vice chairman and name Monticone to the seat. The resolution passed.
The directors also discussed salaries for the upcoming year. Drunsic proposed $120,000 for himself, $100,000 for Monticone, and $80,000 for Stanton. This resolution allowed salaries to change subject to the discretion of the board, and that all compensation be deferred subject to sub-chapter S regulations. According to the meeting minutes, “total deferred compensation would be paid at the rate of 75% of the profits from the income generated 60 days prior, provided that there was a profit from the income generated 90 days pri- or, and that any deferred compensation
At some point during Stanton’s time off, Drunsic sent an e-mail to Stanton saying that he would reissue Stanton’s parking pass and cell phone upon his return to the company. Stanton Dep. at 179 (document # 33). According to Stanton, Drunsic also asked for his computer password at one point. Id. Around June 3, Stanton determined that he would not return to Lighthouse, and he informed Drunsic of his decision in a June 14 email.
On July 17, 2004, Stanton filed a complaint for nonpayment of wages with the Attorney General, pursuant to Mass. Gen. Laws ch. 149 § 150, claiming $186,003 in gross unpaid wages earned from April 1, 2003, to June 14, 2004. On January 3, 2005, Lighthouse filed for bankruptcy. On Schedule F of its petition, a form listing creditors holding unsecured nonpriority claims, the corporation stated that it owed $180,256.43 to Stanton, $262,000.00 to Drunsic, and $58,333.24 to Monticone for “deferred compensation.” Margolis Aff., Ex. P (document #26-4). On December 2, 2005, the bankruptcy judge granted the U.S. Trustee’s motion to dismiss. Id. 2
III. PROCEDURAL HISTORY
Stanton filed this suit on March 30, 2006, raising claims for breach of contract against Lighthouse (Count I), violation of the Wage Act against Lighthouse and Drunsic (Count II), and breach of fiduciary duty against Drunsic (Count III). On April 20, 2006, the defendants answered, raising counterclaims for breach of contract, breach of fiduciary duty, and violation of Mass. Gen. Laws ch. 93A.
On February 5, 2007, I granted the plaintiffs motion on the pleadings as to the defendants’ counterclaim for breach of contract, which was based on Stanton’s alleged violation of his covenant not to compete. Because the covenant applied only to the time period during which Stanton was employed by Lighthouse, his post-employment activity could not constitute a violation of that covenant.
On January 30, 2008, Stanton moved for partial summary judgment on his Wage Act claim. On February 20, 2008, the defendants filed a cross-motion for partial summary judgment on Stanton’s Wage Act and breach of contract claims. In an electronic order dated July 8, 2008,1 held that Stanton was an “employee” for the purposes of the Wage Act, but denied summary judgment as to both claims because they turned on disputed factual questions about the deferral clause in Stanton’s contract (the amount of time the salary could be deferred, the extent to which payment was contingent on profitability). These issues appeared to require consideration of parol evidence.
On July 21, 2008, Stanton filed a motion to reconsider (document # 38), arguing that the cross-motions for summary judgment turned not on an interpretation of the contract, but on an interpretation of the Wage Act. He contends that his employment contract’s deferral provision is unenforceable as it is in violation of the Act. On August 1, 2008, the defendants filed their own motion to reconsider, agreeing that the case called for an interpretation of the Wage Act. They argue that the Wage Act does not forbid deferral arguments, and they further ask that I reconsider my judgment that Stanton
IV. MOTIONS TO RECONSIDER
The Massachusetts Weekly Wage Act requires that “[e]very person having employees in his service shall pay weekly or bi-weekly each such employee the wages earned by him to within six [or seven, depending on length of the workweek] days of the termination of the pay period during which the wages were earned.” Mass. Gen. Laws ch. 149, § 148. 3 The Act allows an employee to recover treble damages, attorney fees, and costs.
To make out a Wage Act claim, Stanton must prove (1) he was an employee under the statute; (2) his deferred compensation constitutes a ‘wage’ under the statute; (3) the defendants violated the Act by not paying him his wages in a timely manner; and (4) the individual defendant Drunsic was a corporate officer as defined by the statute.
See Allen v. Intralearn Software Corp.,
No. 05-WAD-03,
The parties dispute the first two elements. As to the third element, they agree that Stanton’s contract allowed the board to defer his compensation and that Stanton was never paid his salary (save for a one-time sum of $6,000), but they disagree on whether such deferral arrangements are permissible under the Wage Act. 4 Finally, they agree on the fourth element, that Drunsic is an employer under the Act because he is an officer “having the management of the corporation.” § 148.
Thus, there are two parts to the analysis of Stanton’s Wage Act claim: First, is he eligible for protection under the Act? This question depends on whether he was an “employee” and whether his deferred salary constituted “wages” as defined by the statute. Second, if the Wage Act does apply, does Stanton’s contractual provision allowing his compensation to be deferred violate the Act’s prohibition on special contracts seeking to side-step the statute?
A. Stanton’s Eligibility for Protection Under the Act
1. Whether Stanton Is an “Employee”
In my electronic order of July 8, 2008, I held that “it seems relatively clear that Plaintiff was an ‘employee’ within the meaning of the Wage Act, if not for the entire period of his employment, then at least for some of it.” I now reaffirm that holding.
Under the statute, an “employee” is “an individual performing any service,” with limited exceptions not relevant here.
5
Their first argument seeks to exclude startup co-venturers as analogous to “cooperative associations,” which are specifically exempted from coverage under § 148. Defs.’ Mem. in Support of Cross-Mot. Summ. J. at 8 (document #30). The defendants cite no case law for this proposition, and indeed they cannot, as no court has ever excused a startup entity from the statute’s commands on this basis. Moreover, cooperative associations have a unique purpose and structure, distinct from those of ordinary corporations. These associations “are formed for the mutual benefit of persons who, more or less closely, are neighbors, and whose greatest interest in them is the opportunity to purchase supplies of good quality at a low price, or to dispose to advantage of farming, products or the like, rather than to have a fixed investment of interest-yielding capital.”
Lindsay v. Arlington Co-op. Ass’n,
The defendants’ second argument is that one who qualifies as an employer under the Act — as Stanton does, having served as the company’s president, § 148 — may not also claim its protection as an employee. Only one case has addressed this question directly. In Olsson v. E.F. Institute for Cultural Exchange Inc., No. 00-4075 (Mass.Super.Ct. July 20, 2001), the court granted a motion in limine barring the parties from making reference to the Wage .Act based on its holding that the plaintiff, as former president of the company making a $500,000 base salary and $100,000 in bonuses, could not state a claim for unpaid wages in the posture of an employee. For the reasons that follow, I decline to follow this case.
The court’s textual analysis did not demand the result it reached. The court wrote, “[b]ased on the clear, unambiguous statutory language, Olsson is the employer for purposes of G.L. c. 149 § 148 and thus is precluded from being an employee able to recover under this statute.”
Id.
at 3. The first clause of that sentence is indisputable: the plaintiff served as president and so was an employer by statutory definition. The second part does not neces
The
Olsson
court also based its holding on the purpose of the Wage Act as articulated in
Baptista v. Abbey Healthcare Group, Inc.,
No. 95-10125,
[S]ection 148 explicitly refers to “employees engaged in a bona fide executive, administrative or professional capacity” in the context of permitting said employees to be paid biweekly, semimonthly or, at the employee’s option, monthly instead of requiring them to be paid within six days of the termination of the pay period as is the case with most other employees. G.L. c. 149, § 148. Section 148 goes on to provide that “the words salaried employee shall mean any employee whose remuneration is on a weekly, bi-weekly, semimonthly, monthly or annual basis .... ” G.L. c. 149, § 148 (emphasis added). Section 148 explicitly lists categories of employees to whom “[t]his section shall not apply.” One of those categories is not highly paid employees. Had the Legislature intended the Wage Act to apply only to low-wage employees, it surely would have explicitly so said. The plain and unambiguous statutory language demonstrates that executive and professional employees, no matter how highly compensated they may be, are protected by the Wage Act from the unreasonable detention of their salary.
Id.
at *2. Similarly, the state appeals court allowed a manager making $90,000 to sue under the Act in
Okerman v. VA Software Corp.,
Finally, I can find no case that has relied on Olsson; even the parties did not brief it. Furthermore, at least one other case has suggested the opposite result. In Kohli the defendant argued that the plaintiff, a vice president for engineering, could not sue as an employee under the Wage Act because he qualified as an employer by virtue of being an “officer or agent having the management of such corporation.” The court did not reach the issue because the plaintiffs level of responsibility was not clear. Id. at *3. Nonetheless, it commented that “[i]t does not necessarily follow that a person cannot be both an employer and an employee for purposes of section 148.” Id. The court gave the following example:
There appears no reason to assume, for example, that the Legislature intended to deprive a comptroller of the right to seek treble damages under chapter 149 if the president of the corporation for whom he works decides, on a whim, not to pay the comptroller’s salary even if, under some circumstances, the comptroller himself would incur personal liability for failure to timely pay employees.
Id. at *3. 7 Because I agree with the Kohli court, I hold that Stanton is an employee who may bring suit under the Wage Act.
2. Whether Stanton’s Unpaid Salary Was a “Wage”
Somewhat obliquely, the defendants also argue that Stanton’s annual salary did not amount to “wages” covered by the Wage Act. This is an unlikely argument, as the statute uses the terms “wages” and “salaries” interchangeably.
See, e.g.,
§ 148 (“employees whose salaries are regularly paid ... at a weekly rate ... may be paid bi-weekly or semi-monthly unless such employee elects at his own option to be paid monthly”). Nonetheless, Lighthouse and Drunsic cite
Boston Police Patrolmen’s Association v. City of Boston,
In
Boston Police,
law enforcement officers sued the city for violation of the Wage Act because their contributions (drawn from their paychecks) to a tax-exempt,
The defendants also cite a number of cases suggesting that compensation payable only upon some contingency is not a “wage” under the Act.
See Cumpata v. Blue Cross Blue Shield of Mass., Inc.,
B. Does the Deferral Provision Violate the Wage Act?
The Supreme Judicial Court has held that the Wage Act was designed “primarily to prevent unreasonable detention of wages.”
Boston Police,
The cases on point, all at the state superior court level, are in tension.
Sword v.
In
Kalra v. Viking Networks, Inc.,
No. 02-2171,
A third case,
Dobin v. CIOview Corp.,
No. 01-00108,
For several reasons, Dobin seems a better statement of the law than Sword II or Kalra. Neither Sword II nor Kalra analyzed the deferral agreement in light of the statutory provision prohibiting special contracts. Sword II did not even hint at its existence, and Kalra mentioned it without analysis. Both cases assumed the validity of deferral agreements and focused on different questions — in Sword II, whether the profitability trigger for payment had been met, and in Kalra, whether the parties had in fact agreed to the deferral. Dobin, by contrast, rested its holding on the textual meaning and purpose of the special contracts provision:
The provision is unconditional; it sets forth no circumstance in which such a waiver would be lawful.... Here, the words used in the statute are clear, as is the legislature's] purpose — to prevent the unreasonable detention of wages.... Viewing the words used in this provision in light of the statute’s legislative purpose, it is plain that the Legislature intended to bar any contractbetween an employer and employee that denied the employee the prompt payment of wages guaranteed by the Wage Act. The oral deferral agreement entered into between [the defendant company] and [the plaintiff] was precisely such a prohibited agreement because it would have permitted [the company] to postpone paying [the plaintiff] her monthly wages well beyond the six days provided under the Act.
Id. at *5. Notably, the decision in Kalra was issued fifteen months after Dobin and yet did not address its thoughtful analysis at all.
Moreover, a recent decision of the Massachusetts appeals court supports Dobin’s textualist and coverage-expanding approach. In
Okerman,
in which the appeals court vacated the dismissal of the plaintiffs Wage Act claims on the grounds that his commissions were sufficiently definite to qualify as wages, the court rejected the judicial narrowing of the Act’s coverage based on policy concerns: “One can imagine sound public policy reasons to support the restrictions that have been read into the wage act and employed below. However, whether, as a matter of public policy, the application of the wage act should be so limited is better left to the elected members of our Legislature.” 69 Mass. App.Ct. at 780 n. 11,
Following Dobin, I find that the deferral agreement in Stanton’s employment contract is void as a matter of law. Stanton is an employee and his salary amounts to wages under the Act. Notwithstanding any future startup-protecting revisions by the legislature, the plain text of the statute prohibits attempts to avoid the payment obligation. As the parties do not disputé that Stanton was never paid for his work at Lighthouse, I GRANT summary judgment to Stanton on his Wage Act claim as to liability.
V. MOTION TO AMEND
On July 22, 2008, the defendants moved to amend their answer, originally filed on April 20, 2006, to assert two additional affirmative defenses: (1) a claim for set-off on Drunsic’s part, and (2) the defense of in pari delicto. A court should freely give leave to amend “when justice so requires.” Fed.R.Civ.P. 15(a)(2). However, a court should deny leave when amendment would be futile or would reward undue delay, bad faith, or dilatory motive.
States Resources Corp. v. Architectural Team, Inc.,
A. Set-off of Mutual Claims
Drunsic seeks to assert a set-off defense based on his and Stanton’s “mutual claims” under the Wage Act. Mot. to Amend at 2 (document # 39). Stanton objects that Drunsic has asserted no Wage Act claim in this case and that the applica
B. In Pari Delicto
In pari delicto doctrine is the “principle that a plaintiff who has participated in wrongdoing may not recover damages resulting from the wrongdoing.”
Black’s Law Dictionary
807 (8th ed. 2004). The theory underlying the doctrine is that “courts will not lend aid to parties who base their cause of action on their own immoral or illegal acts.”
Choquette v. Isacoff,
As an initial matter, I note that this case does not involve quite the same level of moral turpitude as many in which courts have applied the doctrine.
See, e.g., Lyons v. Elston,
In the instant case, the deferral agreement violated the Wage Act, and as to that, Stanton and Drunsie appear to stand in equal fault: they voluntarily entered into identical agreements to defer compensation, each signing the other’s contract as a representative of the corporation. While under the general rule, the doctrine of in pari delicto would bar Stanton’s recovery under the Act, a clear exception to the doctrine applies here. Courts grant equitable relief to a party to an illegal contract “where the provision of law rendering the contract illegal was clearly intended to benefit one party over the other, i.e., the public policy is intended to protect persons of the class to which one party belongs.”
Arcidi,
It is appropriate here, as well. The Wage Act by its plain terms aims to protect employees by preventing the detention of wages.
See Am. Mut. Liab. Ins. Co.,
VI. CONCLUSION
Stanton’s Motion for Reconsideration (document # 38) is hereby GRANTED, and Defendants’ Motion for Reconsideration (document # 42) is DENIED. Defendants’ Motion to Amend Answer (document # 39) is also DENIED. This case will now proceed to trial on Stanton’s claims under breach of contract and breach of fiduciary duty; what measure of punitive damages, if any, he should get under the Wage Act; and the defendants’ counterclaims for breach of fiduciary duty and violation of Chapter 93A.
SO ORDERED.
Notes
. In his complaint, Stanton alleges that during this time Drunsic took actions to freeze Stanton out of the process of running the corporation, including taking physical custody of checkbooks and records, signing alone checks that required dual signatures, and changing the password for electronic access to the corporation's operating account without giving Stanton the new password. Drunsic denies all of these allegations.
. The record does not reflect the grounds for the dismissal.
. “Despite its subtitle, 'nothing in the weekly wage law itself requires the weekly payment of wages.’ ”
Okerman v. VA Software Corp., 69
Mass.App.Ct. 771, 775,
. The parties also dispute whether the contract required that any deferral be based on the profitability of the company and when the Board actually voted to defer Stanton's compensation. As I stated in my electronic order of July 8, 2007, these are disputed issues of material fact reserved for trial should I find the deferral provision enforceable.
.The Act excludes from coverage tradesmen and professionals who perform services free of the control of the employer and outside the employer's usual course of business. Mass. Gen. Laws ch. 149, § 148B. It also excludes employees of certain hospitals, certain shareholder-employees of cooperative associations, and casual employees employed by the state or local government. Id. § 148.
. Indeed, the statutory definition of a cooperative association clarifies its distinct structure: "A corporation may be organized under chapter one hundred and fifty-six B, with shares having par value, for the purpose of co-operation in carrying on any business or of co-operative trade.” Id. ch. 157, § 1. "Such corporation shall distribute its earnings or profits among its workmen, purchasers and stockholders at such times and in such manner as its bylaws prescribe, but at least once in every twelve months. No distribution shall be made, unless at least ten per cent of the net profits have been appropriated for a contingent or sinking fund, until an amount has accumulated equal to thirty per cent of its capital stock issued and outstanding. No person shall hold shares in any such corporation to an amount exceeding one thousand dollars at their par value, nor shall a stockholder be entitled to more than one vote upon any subject.” § 2.
. In
Olsson,
the court noted in a footnote that "[t]here is no appellate court decision on this issue of whether a former president of a company may rely on this statute. In other courts, U.S. District and other Superior Court Judges have considered whether and when employees may bring claims under this statute; none of those decisions have dealt with claims of either a President or Treasurer ....” No. 00-4075, at 3 n. 1. That changed six years later in
Kittredge v. McNerney,
No. 03-2146,
. If any deferral agreement violates the Wage Act, then Stanton must prevail on his Wage Act claim (as to liability, at least) regardless of what action the board actually took. Therefore, this is an appropriate issue for summary judgment.
. The court wrote, "[t]his Court recognizes that enforcing this provision in the Wage Act may adversely affect those start-up companies which ask employees to for[go] wages until the company reaches financial viability. This Court does not offer any opinion as to whether the Wage Act is wise in prohibiting deferral agreements in all circumstances, or whether there are ways in which start-ups can avoid this prohibition by paying employees only the minimum wage and offering bonuses that are conditioned on the company’s financial performance. The fact of the matter is that the language of the Wage Act is crystal clear on this point, and, unless and until the Act is amended, this Court is obligated to enforce its clear mandate.”
Dobin,