COURT
OF APPEALS FINDS WAGE PAYMENT ACT MAY COVER SEVERANCE PAY
Elizabeth Torphy-Donzella and Fiona W. Ong
Appeared in the Maryland Bar Bulletin, January 2005
On November 17, 2004, the Maryland Court of Special Appeals,
in a case of first impression, addressed whether severance
pay can constitute “wages” under Maryland’s
Wage Payment and Collection Act. The Court also considered
whether profits from the exercise of stock options could
be included as part of the employee’s compensation,
and further addressed the calculation of damages and attorneys’
fees under the Act.
FACTS
In Stevenson v. Branch Banking & Trust Co., 2004 WL
2601332 (MD. App.), Stevenson, a bank executive, had an
employment contract that provided for payment of “Termination
Compensation” if her employment was terminated before
the end of the three-year term of the agreement. The Termination
Compensation would be based on the highest amount of her
total annual cash compensation – including “cash-based
benefits” – from the past three years. As a
condition of receiving this severance, Stevenson was required
to refrain from competing with the bank for the balance
of the contract term.
Stevenson’s employment was terminated before the contract
term ended. She brought suit, alleging a breach of contract
and a violation of the Maryland Wage Payment and Collection
Act, claiming that she was not paid all severance due to
her under the contract, and that such severance also constituted
wrongfully withheld wages under the Act. Stevenson also
claimed that her annual compensation, on which her Termination
Compensation was based, should have included profits from
the exercise of her stock options.
TRIAL
At trial, the court determined
that the stock options profits were not part of the compensation
received from the employer, and the jury was not allowed
to factor in these profits. The jury found that Stevenson
was not paid the full amount of severance owed, and she
was awarded the amount of unpaid severance on her common-law
breach of contract claim. On her statutory wage payment
claim, the jury awarded her an additional sum equaling three
times the amount of unpaid severance, effectively awarding
Stevenson four times the amount wrongfully withheld. Thereafter,
the judge awarded Stevenson attorneys’ fees as the
prevailing party under the Wage Payment Act.
APPEAL
Both parties appealed. Stevenson argued that the stock
options earnings should have been considered part of her
compensation. The bank argued that Stevenson could not,
as a matter of law, recover severance pay under the Wage
Payment Act because such pay did not meet the statutory
definition of wages (i.e. payment “for work that the
employee performed before termination of employment…”).
The bank also argued that the Wage Act only permitted recovery
of damages in the total amount of three times the unpaid
wages, not four as had been awarded. Finally, both parties
challenged the trial court’s calculation of attorneys’
fees.
THE APPELLATE COURT’S RULING
1. Severance Pay as “Wages”? The Court of Special
Appeals first held that, although the word “severance”
is not mentioned in the statute, “a severance benefit
that is based on the length and/or nature of the employee’s
service, and promised upon termination, may be recoverable
under the Wage Payment Act.” The Court reasoned that
severance negotiated during employment represents “a
type of deferred compensation for work performed during
employment.” Thus, although payable at termination,
it is nonetheless bargained-for in exchange for services.
The Court ruled, however, that Stevenson’s severance
did not meet this definition of wages because it was not
deferred compensation. Instead, it was tied to “the
23 months she agreed to refrain from competing with the
bank, not for the 13 months she actually worked at [the
bank].” Consequently, Stevenson’s claim for
the payment of this severance did not fall under the Wage
Payment Act, but was a contract claim.
2. Stock Options Profits as Compensation? Next, the bank
had argued that stock option profits should not be included
as compensation under the employment agreement because they
were not directly paid by the employer. The Court rejected
the argument that such profits cannot be considered part
of compensation as a matter of law. The Court found the
employment agreement to be ambiguous with respect to whether
such profits were a “cash-based benefit” as
set forth in the definition of compensation contained in
the agreement. Evidence, such as the fact that the profits
were deposited in Stevenson’s account in the same
manner as her paycheck and that they were reported to the
IRS in a comparable manner, suggested that they should be
included in compensation. Therefore, the jury should have
been allowed to determine whether the parties intended to
include the profits as part of Stevenson’s compensation.
3. Treble Damages Under the Wage Payment Act. The Court
of Special Appeals concluded that it was error to award
treble damages in addition to the unpaid wages, pursuant
to the Wage Payment Act because this amounted to quadruple
damages. It clarified that the “treble damages”
provided for by the Wage Payment Act caps the total award
(wages and “punitive” damage) at three times
the unpaid wage.
4. The Calculation of Reasonable Attorneys’ Fees.
To the extent that Stevenson was the prevailing party on
her Wage Payment Act claim for any eligible wages (which
would not include the Termination Compensation, as discussed
above), she would be entitled to attorneys’ fees.
The Court detailed its prior approach set forth in Friolo
v. Frankel, which essentially adopts the federal lodestar
method with appropriate deductions.
IMPACT OF THE COURT’S RULING
Drafters of employment agreements will need to take note
of this ruling because it opens the door for potentially
costly severance pay claims. Severance payments negotiated
at the start of, or during, employment and that are not
tied to post-termination promises may now be deemed “wages.”
Furthermore, even severance pay negotiated at termination
may fall within the definition of wages if the employer
conditions receipt of the pay on the employee’s agreement
to work for a set period prior to termination. Failure to
pay such severance may, accordingly, lead to treble damage
claims under the Wage Payment Act.
On the other hand, severance pay that is negotiated at
termination in connection with a release of claims should
not meet the definition of wages, even as broadly conceived
by this case. This is because such a payment is calculated
to facilitate the exit and to purchase an assurance that
the employer will not face legal claims from the employee
in the future.
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