Maryland Court of Special Appeals Finds
Wage Payment Act May Cover Severance Pay
By Elizabeth Torphy-Donzella and Fiona W. Ong
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.
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.
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.
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
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
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.
Elizabeth Torphy-Donzella and Fiona Ong are partners with Shawe Rosenthal,
LLP, which represents management in all aspects of labor and employment law.
Both focus their practice on employment litigation, including issues of discrimination
and harassment, wrongful discharge and other employment torts, and leave and