Preparing the terms of employee compensation can be a resource-intensive task requiring input from stakeholders across numerous departments, including human resources, finance, and legal. However, as the Massachusetts Appeals Court’s recent decision in Alfieri v. Merrimack Pharmaceuticals, Inc. demonstrates, investing those resources to complete the task will pay dividends when an employer is faced with a potentially costly claim for unpaid wages.

Background

In May 2014, Merrimack Pharmaceuticals, Inc. sent Michael Alfieri a letter offering him the position of corporate controller. In its offer letter, Merrimack explained that it would compensate Alfieri using a “total target cash compensation (‘TTCC’)” method under which it would pay him a percentage of his total compensation in biweekly salary payments and would retain a percentage to be paid in the first quarter of the following year. The offer letter set out three conditions that had to be met for Alfieri to receive the retained portion of his TTCC: “(i) the employee is an active employee of the Company on the date that the retention is paid, (ii) the employee is continuing to meet expectations and (iii) the Company is performing adequately, as determined by the Company’s Board of Directors (the ‘Board’).” After explaining Alfieri’s proposed compensation, the letter expressly stated that it “superseded ‘all prior understandings, whether written or oral, relating to the terms of [Alfieri’s] employment.’” Alfieri accepted the offer by signing the letter and began working for Merrimack in July 2014.

Pursuant to the offer letter, Merrimack paid Alfieri the retained portion of his 2014 and 2015 TTCC in the first quarter of the following year. The paycheck for each of those payments designated the amount as a “bonus.”

In January 2017, Alfieri resigned from Merrimack. At that time, Merrimack had not yet paid the 2016 retention payments to its employees. When Merrimack made those payments a few months later, it did not make one to Alfieri because he was no longer a Merrimack employee.

Alfieri sued Merrimack (and two of its executives), alleging violations of the Massachusetts Wage Act, the terms of his offer letter, and an alleged oral promise Merrimack and the executives had made to him.  The trial court granted summary judgment in favor of Merrimack (and executives), and Alfieri appealed.

Decision

The Appeals Court affirmed summary judgment and rejected all of Alfieri’s arguments.

First, Alfieri argued that Merrimack’s failure to pay him the retained portion of his 2016 TTCC violated the Wage Act because it was based on an impermissible “special contract,” specifically, the provision of his offer letter conditioning eligibility for a retention payment on his continued employment. The Appeals Court rejected that argument. It began its analysis by recognizing that, although the Wage Act prohibits employers from exempting themselves “from the timely and complete payment of wages by ‘special contract,’” protected “wages” do not include “contingent” or “discretionary” payments (subject to an inapplicable exception for commission payments). The Court then found that Alfieri’s 2016 retention payment was both contingent and discretionary because his offer letter conditioned his eligibility for the payment on his and Merrimack’s performance, as determined by the Board in its discretion, and on his continued employment. Therefore, the Appeals Court held that the 2016 retention payment was not a “wage” under the Wage Act, and accordingly, that the Act’s prohibition on “special contracts” was inapplicable.

Second, Alfieri asserted that Merrimack breached the offer letter by not paying him the retained portion of his 2016 TTCC. The Appeals Court disagreed, reasoning that the offer letter “plainly” required Alfieri to be a Merrimack employee on the date it made retention payments, and he had resigned months before it paid the 2016 retentions. Thus, Merrimack’s decision not to pay Alfieri his 2016 retention comported with the terms of the offer letter.

Finally, Alfieri contended that Merrimack and the executives had orally promised to pay him an annual retention payment during the negotiations leading up to the offer letter. Regardless of whether Merrimack or the executives had made such a promise, the Appeals Court found it unenforceable because the offer letter expressly stated that it “superseded any prior oral understanding relating to the terms of [Alfieri’s] employment.” Given that language, the Appeals Court upheld the trial court’s dismissal of Alfieri’s claim based on an alleged oral promise.

Takeaways for Employers

Alfieri illustrates the importance of determining and delineating in writing the conditions an employee must satisfy to earn incentive compensation. The conditions Merrimack set out in Alfieri’s offer letter and the inclusion of an express integration clause informing Alfieri that the letter superseded any earlier agreements helped the company avoid a time-consuming and costly trial and potentially significant liability in the form of mandatory treble damages and attorneys’ fees under the Wage Act. In light of Alfieri, Massachusetts employers should review their offer letters and compensation plans and ask themselves the following four questions:

1. Is non-commission incentive compensation (e.g., a bonus) contingent upon continued employment, the employee’s individual performance, the company’s overall performance, and other considerations that may affect the company’s willingness or ability to pay it?

2. Does the letter or plan clearly communicate those contingencies to eligible employees?

3. Does the letter or plan give the company sole discretion to determine whether any subjective contingencies (e.g., the employee’s performance and the company’s overall performance) have been satisfied?

4. Is there an integration clause informing employees that the letter or plan supersedes any earlier agreements, promises, representations, and understandings regarding their compensation?

If the answer to any of the above questions is “no,” the employer should consider updating its offer letters and compensation plans to provide it with as much protection as possible under Alfieri.