Originally published Spring 2004
The Massachusetts Appeals Court recently provided guidance on whether severance pay is a wage under the state’s wage payment law. In the same decision, Prozinski v. Northeast Real Estate Services, the Court also considered whether an employee’s breach of his fiduciary duty to his employer relieves the employer of its obligations under an employment agreement.
Stephen Prozinski, the employee-plaintiff, had served as the chief financial and operating officer at Northeast Real Estate Services ("Northeast") from April 1998 until February 1999. Prior to the commencement of his employment with Northeast, he received an offer letter from the Company. In the offer letter, Northeast promised to continue to provide benefits to Prozinski and pay him severance for one year following his termination, in the event that the company terminated him within the first two years of his employment. Prozinski acknowledged his acceptance of Northeast’s offer by countersigning the offer letter.
In November 1998, three female employees reported to Northeast’s founding principals that they were considering resigning from the company due to the fact that Prozinski had created a discriminatory and hostile working environment. In February 1999, Northeast terminated Prozinski’s employment and stated in its termination letter that Prozinski’s employment was being terminated because of his financial misconduct, which was related to reimbursement requests for personal expenses and fund mismanagement, and sexual discrimination and harassment. According to Northeast’s letter, these actions amounted to a breach of Prozinski’s fiduciary duty to the company. As a result, Northeast refused to pay Prozinski severance and did not continue his benefits following his termination.
Prozinski brought suit against Northeast alleging, among other things, that Northeast violated the Massachusetts wage payment statute by refusing to pay Prozinski all wages in full on the day he was discharged. Prozinski also claimed that Northeast breached the parties’ contract when it refused to pay him severance and denied him benefits following termination. The trial court granted Northeast summary judgment on Prozinski’s wage claim, but granted Prozinski summary judgment on his breach of contract claims. Both parties appealed.
On appeal, Prozinski argued that severance pay is a wage under the Massachusetts wage payment statute. Thus, he argued, on the day Northeast discharged him, it was statutorily obligated to pay his wages, including severance pay, in full.
The Appeals Court disagreed and emphasized that the wage payment statute must be narrowly construed. The Appeals Court noted that the statute expressly includes only holiday pay, vacation pay, and definitely determined commissions in its definition of the term "wage." In addition, the Appeals Court likened severance pay to a commission based on a contingency, and reiterated that Massachusetts courts have regularly held that commissions based on contingencies are "outside the scope of the wage act." Applying this logic to the present case, the Appeals Court reasoned that since severance pay is based on a contingency, i.e., upon an employee’s termination, it, too, is outside the wage act’s scope.
In response to Northeast’s appeal, the Appeals Court rejected Northeast’s initial contention that no contract existed between Prozinski and the company. The Appeals Court then declined to accept Northeast’s claim that the contract’s severance provision was ambiguous, notwithstanding the fact that the offer letter provided the parties’ with the ability to further define the details of the agreement’s termination language.
However, the Appeals Court did accept Northeast’s argument that a triable issue of fact existed as to whether Prozinski materially breached the parties’ agreement by breaching his fiduciary duty. Specifically, the Appeals Court held that a judge or jury should determine whether Prozinski’s financial misconduct and gender-based discrimination and harassment could amount to a material breach of his contract. In short, the Appeals Court reasoned, a fact finder had to answer whether by engaging in such actions, Prozinski subordinated Northeast’s interests to his own. As a result, the Appeals Court reversed the summary judgment ruling in favor of Prozinski and remanded the case for further proceedings on the breach of fiduciary duty claim.
The Prozinski case is significant for at least two reasons. First, Massachusetts employers now have further support that courts do not view severance pay as a wage. Although the issue has not yet been decided by the Massachusetts Supreme Judicial Court, the state’s highest court, it appears for now that a Massachusetts employer’s failure to pay severance pay will not expose that employer to the wage payment statute’s civil and criminal penalties, including treble damages.
In addition, the Appeals Court’s finding in favor of Northeast – that an employee’s breach of fiduciary duty to his/her employer can serve as an affirmative defense to an employee’s breach of contract claim – may open the door for employers to explore whether an employee’s bad acts might render an otherwise valid contract unenforceable. Prozinski thus provides employers with a potentially powerful defense mechanism in litigating with ex-employees who have engaged in bad-faith conduct.
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