The District of Massachusetts recently held that garden leave payments, whereby a former employee subject to a restrictive covenant is paid by the former employer for the duration of the restrictive period, do not constitute “wages” under the Massachusetts Wage Act.
In Carroll v. Mitsubishi Chemical America, Plaintiff Khristine Carroll, a former Director of Commercial Operations at Defendant Mitsubishi Chemical America (“MCA”), alleged that MCA breached its employment contract with her and unlawfully failed to provide her wages when MCA sought to opt out of the non-compete provision and related garden leave payments.
Carroll joined MCA when it acquired her original employer. In connection with the acquisition, MCA asked that Carroll sign an employment agreement (the “Agreement”) with restrictive covenants including a non-competition clause. For the extent of the 24-month period during which Carroll could not compete with MCA, Carroll was to receive a monthly fee equivalent to 100% of her highest monthly salary earned in the two-year period preceding the termination of her employment. The length of the non-compete period and the amount of the garden leave payments were “extensively negotiated.” Carroll ultimately executed the Agreement and began working for MCA.
However, Carroll ultimately resigned from her position and took a non-competitive position with another employer and curtailed her business activities to remain in compliance with the Agreement. Eventually, MCA sent written notice to Carroll of its intent to opt out of the non-compete period and garden leave payments, while keeping the Agreement’s remaining restrictive covenants intact.
Believing she was entitled to the garden leave payments under the Agreement and that they were properly classified as wages, Carroll filed suit for breach of contract, breach of the implied covenant of good faith and fair dealing, and violation of the Massachusetts Wage Act. MCA moved to dismiss Carroll’s complaint, arguing the non-competition clause was unenforceable and the garden leave payments were not “wages” under the Wage Act.
The court denied MCA’s motion as to Carroll’s contract-based claims. The parties disputed whether the Agreement fell within the ambit of the Massachusetts Noncompetition Agreement Act (the “MNAA”), which invalidates non-competes longer than 12 months from the last date of employment. Interestingly, MCA argued that its agreement violated the MNAA by imposing a non-compete lasting longer than the statutory maximum, and thus it could not be liable for breach of the agreement. However, the court held that, viewing the facts and making all inferences in Carroll’s favor as required at the dismissal stage, there were sufficient facts on the face of the complaint to avoid application of the MNAA’s 12-month bar.
However, and more notably, the court granted MCA’s motion as to Carroll’s Wage Act claim. Under the Wage Act, an employer faces civil and criminal penalties, treble damages, and attorneys’ fees in the event it fails to promptly pay “wages earned.” The term “wages” is not defined by the Wage Act, but to qualify as wages, Massachusetts law requires that the payment amounts be “earned,” meaning “acquired by labor, service, or performance.” Payments like severance pay are not “earned” but rather are contingent upon the severance occurring. Further, the court noted that there is no evidence the legislature intended to apply Wage Act remedies to employers’ breach of purely contractual obligations to pay an employee. Accordingly, while the MNAA somewhat confusingly requires that garden leave provisions must “provide for the payment, consistent with the requirements for the payment of wages” under Mass. Gen. L. ch. 149, § 148, of at least 50% of an employee’s annualized base salary (emphasis added), the court determined that such payments do not constitute wages under the Wage Act. Thus, the court held that Carroll’s Wage Act claim failed, and she could proceed only on her contract claims.
The District of Massachusetts has now taken a decisive position that garden leave payments are not “wages” under the Massachusetts Wage Act, meaning breach of an obligation to provide such payments does not also constitute a Wage Act violation. The court cited relatively broad language from prior Massachusetts decisions suggesting any payments pursuant to a contractual obligation to pay a current or former employee are likely not Wage Act “wages,” suggesting a narrower interpretation of the Act’s application than sought by Carroll in this case. As our colleagues noted earlier this year in this Legal Update, the Massachusetts Supreme Judicial Court recently held that all Wage Act violations trigger treble damages, even if the employer remedies the violation before litigation ensues and even if the employer’s violation was a good faith mistake, and therefore this ruling is notable as it significantly limits an employee’s leverage in disputes over garden leave payments.