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., 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 that 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 rather 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.