Triple Trouble? Wage Laws, Severance Benefits, and Treble Damages

When an employer fails to pay an employee wages that are due, the employer might have to pay far more than the amount it owed.  Under the laws of a number of states, employees who don't receive earned wages can sue for those wages – and the wage laws may permit treble damages (i.e., a recovery of three times the amount of the lost wages) if the employee can prove the claim.

These kinds of wage laws don’t just apply to hourly employees, but can also be extended to cover C-level executives who are entitled to severance benefits and bonuses.  Velarde v. PACE Membership Warehouse, Inc., 105 F.3d 1313 (9th Cir. 1997), shows how that might occur.

In that case, PACE, a wholesale warehouse club, intended to sell one of its locations.  To keep the business humming until the closing date, it sent 25 of its warehouse employees a letter promising them a “Stay On Bonus” and severance pay if they would work until January 14 of the next year, the date on which it planned to shut down operations.  After sending that letter, however, PACE decided to sell to Sam’s Club, which would keep the warehouse open for bulk-buying business.  The PACE employees stayed on after the sale to work for Sam’s.  Because they weren't out of a job, PACE refused to pay them the promised bonus and severance pay.

The trial court ruled on summary judgment that PACE had breached a contract requiring payment of the bonus and severance to the employees, and the Ninth Circuit affirmed that ruling.  After finding that PACE had breached its contract, the trial court applied Arizona’s wage law and trebled the damages due to the employees.  On appeal, PACE conceded that the wage law applied to severance pay and bonuses, because the Arizona Supreme Court had already addressed that issue.  However, it sought safe harbor in a provision of the law that allowed wages to be withheld if there was a “reasonable good faith dispute as to the amount of the wages due.”

The Ninth Circuit wasn’t buying what PACE was selling.  Because there was no material dispute that the plaintiffs had a binding contract and completed the task required of them – working until January 14 – there was no reasonable dispute that the wages were due.  The Ninth Circuit also used the fact that the trial court had granted summary judgment, rather than submitting the plaintiffs’ claims to the jury for decision, as support for its finding that the trial court had properly found a lack of a good faith dispute.

Under Velarde, it’s easy to see how an executive with a claim for breach of contract based on the failure to pay severance or bonuses could argue that the unpaid amounts were “wages” entitling him or her to treble damages.  Of course, every jurisdiction isn’t Arizona, and may not take such an expansive view of “wages” under its own statute.  Further, if there is in fact a “good faith dispute” about the executive’s entitlement to bonuses or severance, then the safe harbor in wage laws like Arizona’s would apply.  Regardless, however, executives and companies would be wise to consider wage laws and their potential impact before a potential dispute turns into litigation.

• Breach of Contract