The Wage Act and Equity Grants: Some Risks That Startup Should Consider

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One of the biggest challenges startups and early stage companies face is attracting and retaining talented employees. When the potential of a company outstrips its ability to pay market value salaries, compensation packages that include grants of stock or options can bridge the gap until the business has sufficient cash flow. There are many advantages to these compensation arrangements, but companies need to be aware of some of the legal pitfalls as well.

First, employers must be aware of minimum wage requirements under both federal and state law. Federal minimum wage requirements are set out in the Fair Labor Standards Act (the "FLSA"), which requires employers to pay at least $7.25 per hour and in general does not permit wages to be offset by the value of any equity given. 29 U.S.C. § 207(e). Thus, a startup that pays its employees solely in equity would be in violation of the FSLA.

In addition to the $11 minimum wage in Massachusetts, employers must also contend with the Massachusetts Payment of Wages Law, Mass. Gen. Law ch. 149, § 148, commonly known as the Wage Act. The Wage Act requires employers to compensate their employees for earned wages at regular intervals. Although the Wage Act does not specifically define "wages," the Massachusetts courts have steadily interpreted the Wage Act to include many different compensation arrangements. Once a form of compensation is considered a "wage" within the meaning of the Wage Act, an employer is subject to serious criminal and civil penalties and treble damages if the amount earned is not paid when it becomes due and payable. Smith v. Unadine Corp., 2017 WL 4411249 (Mass. Super. 2017). The severity of the Wage Act is underscored by the fact that it imposes individual liability on the company's "president and treasurer" and "any officers or agents having management of such corporation." Segal v. Genitrix, LLC, 478 Mass. 551 (2017).

In light of the breadth and harsh penalties of the Wage Act, a Massachusetts startup looking to pay employees with stock or options must tread carefully to avoid potential problems under the FLSA and Wage Act. Any compensation plan should include a base salary of at least the minimum wage in cash paid on a weekly or bi-weekly basis to insulate against liability. Any stock or options to supplement salary should be structured so that it is contingent on clear performance or revenue benchmarks. Incentive stock options provide a good example of this arrangement. Not only will including appropriate contingencies help ensure that everyone is on the same page as far as expectations, but it will protect the compensation from being considered a "wage" under the Wage Act. Stanton v. Lighthouse Financial Services, Inc., 621 F. Supp.2d 5 (D. Mass. 2009).

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