From the Labor & Employment Practice.

Payroll Mistakes Can Cost You – Big!

February, 2003

For most businesses, the single largest class of operational expenses is payroll and related expenses. In addition to wages paid directly to employees, employers are required to pay a share of federal taxes, withhold and remit state and federal income taxes, and contribute to the state and federal unemployment compensation coffers. A majority of employers also provide a package of fringe benefits under which they may pay all or a portion of its employees´ insurance premiums or provide contributions to retirement plans. Because these expenses and the administration of them are so well-known to employers, legal problems related to them are the exception rather than the rule. There is, however, a little-known but powerful law in Maryland relating to the payment of wages that, if you are unfamiliar with, may result in an unhappy surprise if you violate it.

The Maryland Wage Payment and Collection Law, Md. Code, Lab. & Emp. Art. §§3-501 et seq., has been in existence for many years, but the increasing number of reported cases addressing the Law from Maryland´s appellate courts indicates that employees are now using the Law with greater frequency. Because the Wage Payment Law allows recovery, in certain situations, of up to three times the amount of wages otherwise due, as well as an award of attorneys´ fees and costs, all employers should be aware of the Law´s requirements and how they have been applied. This article is intended to provide a brief discussion of the most important provisions of the Wage Payment Law and how courts have construed some of those provisions.

Before discussing the critical definition of “wage” and the remedial provisions in the Wage Payment Law, some less-obvious but no less important provisions of the Law deserve comment. First, each employer must set regular pay periods and pay days. Except for administrative, executive, or professional employees, each employee must be paid no less frequently than every two weeks or twice each month. Having set these regular pay periods and days, the employer must give notice to each employee, at the time of hiring, of the pay rate and the regular pay periods and days. When a regularly scheduled pay day falls on a non-work day, payment must be made on the preceding workday, not the following workday. Although these practices are commonly followed, probably only a few employers are aware that they are legally required.

Lesser-known provisions may cause trouble if they are violated. The only deductions that an employer may make from an employee´s wages are those ordered by a court such as a garnishment for child support, otherwise allowed or required by law such as taxes, or authorized expressly in writing by the employee such as benefits premiums. Thus, for example, a retailer is not entitled to automatically deduct from a cashier´s wages any “shortage” in a cash drawer unless the cashier has specifically authorized it in writing. It is very important to note that notice of any change in a pay day or wage, except for a wage increase, must be given to an employee at least one pay period in advance. Thus, although an employer is, in most cases, entitled to unilaterally decrease an employee´s wages, advance notice of the change must be provided.

Employers most often run into trouble when questions arise concerning whether, when, and for what an employee is entitled to payment when the employee leaves for any reason. The Wage Payment Law specifically requires an employee who leaves employment for any reason to receive all wages he or she earned before the termination on or before the same date they would otherwise have been paid. Thus, if the employee´s regular pay days are the 1st and 15th of the month and she leaves on the 5th, she must be paid by the 15th all wages she earned through the 5th and which would otherwise have been paid on the 15th. Further, if commissions earned, for example, are payable on the last day of the month, all commissions the employee earned before the 5th must be paid on the last day of that month.

All of this discussion leads to the critical point of the Wage Payment Law, namely what are “wages.” It is critical to note that the Wage Payment Law defines the term “wages” broadly as “all compensation that is due to an employee for employment,” and specifically includes bonuses, commissions, fringe benefits, and “any other remuneration promised for service.” Thus, a “wage” is more than simply the employee´s salary or hourly rate of pay. Knowing what portions of an employer´s compensation package are “wages” may be the difference between a victory and a costly loss if a former employee sues you to recover alleged unpaid wages.

The most important recent Maryland cases construing the Wage Payment Law address bonuses and commissions, elements of employee compensation that, although optional, are quite common. Two clear and important principles arise from these cases. First, in accordance with the statutory language, whether a “bonus,” “commission,” or other compensation element will be considered a “wage” subject to enforcement depends upon whether the compensation was “promised for service.” Thus, if the employer has an incentive plan that unconditionally awards additional compensation to an employee for meeting certain performance goals, that “bonus” will be considered a “wage” that must be timely paid according to the provisions of the plan. Conversely, if the incentive plan expressly reserves to the employer discretion about whether, when, and how much additional compensation will be paid, the “bonus” most likely will not be considered a “wage.”

Second, whether compensation has been “earned” is important. An element of compensation that is completely discretionary, or that is not based on an employee´s objectively measurable individual performance, will often not be considered “earned” compensation. Whether compensation is “earned” may also depend, to some extent, on the employee´s duties. If, for example, an employee is required to perform five tasks to earn a commission from a certain sale, but resigns after completing only three of those tasks, the employer might reasonably assert that the employee did not “earn” the commission. Thus, if a salesperson who may receive commission on a sale is required to ensure proper shipment of an order, resolve shipping problems, and ensure payment, resigns immediately after taking the sales order, leaving for another employee the tasks of ensuring shipment, resolving disputes and collecting payment, the first employee may not be entitled to a commission on the sale. This is a situation in which a “split commission” may be appropriate, and should be addressed by the commission policy.

An employer must be careful, however, about requiring continued employment as a condition for receiving additional compensation. At least one Maryland case has held that such a requirement had no legal effect where the employee proved that he had performed all tasks necessary to “earn” the additional compensation. Because of the uncertainty that this holding creates for many incentive plans, employers who provide “incentive” pay may wish to have their plans reviewed for compliance with the Wage Payment Law.

The “hammer” of the Wage Payment Law lies in its enforcement provisions. An employer who wilfully violates any provision of the Wage Payment Law is subject to a criminal fine of up to $1,000. This is not, however, the most serious “penalty” the employer may suffer. In addition to the criminal liability, the employer is also subject to civil liability in an enforcement action by either the state Commissioner of Labor and Industry or the employee. In these civil enforcement actions, if the employer is found to have withheld wages in violation of the Wage Payment Law, and there was no “bona fide dispute” concerning the wages, the employer may be liable for up to three times the amount of the unpaid wages, reasonable attorneys´ fees incurred by the Commissioner or the employee, and other costs of the enforcement action. Thus, a failure to pay, for example, a $5,000 commission may end up costing the employer $15,000, plus attorneys´ fees and costs. In many cases, the risk of this expanded liability will not be worth the fight.

Maryland is not unique in having a set of statutes addressing the payment of wages, or that provides both criminal and civil penalties for violations of those statutes. Although the specific provisions, including the type and amount of penalties available, will vary from state to state, such laws are the rule rather than the exception. Because enforcement actions pursuant to these laws are becoming more common, employers are well-advised to become familiar with the laws in all locations where they operate, and to review all compensation plans to ensure their compliance with these laws. As noted above, incentive pay plans for payments such as “bonuses,” “commissions,” and “profit-sharing” are most at risk and should be promptly reviewed if the employer has any doubt about their compliance with the law