Can Employers Determine the State That Governs Final Pay?

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By Allison M. Gatrone

“The company owes me three times the wages from my final paycheck because that is what's required under Maine law,” said Jim, a salesman in Maine.

“We owe you a much smaller amount because your employment contract stated that it was governed by California law,” said Henry, a lawyer for the salesman's California employer.

FACTS:A computer-hardware sales representative started working for a California company after signing an employment contract with a choice-of-law provision stating that the contract was governed under California law. The sales representative performed most of his services in Maine, traveling a few times a year to California for meetings and traveling to out-of-state clients monthly.

The contract also had an commission plan, which the employer changed a few years after the salesman began employment. The change in the commission plan effectively lowered the sales representative's pay, and he complained about this reduction. The employer promised to alter the commission plan to increase is compensation, but it did not fulfill that promise, so the employee resigned.

After his resignation, the employee signed a separation agreement that included severance pay. The employee claimed that the employer promised to fully compensate him at termination, but the company stopped payment on the check and requested that he accept a lower offer because the employer said a previous lump-sum payment should be deducted. The former employee filed a lawsuit claiming that the employer failed to pay him final wages.

A federal district court ruled that there was no agreement between the employee and employer regarding commission structure after the commission plan was changed, leaving no contract between them during the last two years of the sale representative's employment. A jury awarded $70,331 to the former employee as a reasonable value of his services.

The court found that California law applied by examining the choice-of-law provision in the original employment contract and determining the intent of the parties at the time employment started. The issue at hand was “a dispute about the terms and conditions of the employment relationship and the parties agreed and intended that disputes about their employment relationship would be governed by California law,” the district court said.

A change in a commission plan reduced a salesman's salary despite a signed employment contract and severance pact.

The salesman appealed the decision, claiming that Maine law applied because he performed most of his services in Maine. The employer claimed that California law applied because it was based in California.

If Maine governed the decision, then the employee would be owed triple his wages as damages, but if California governed the decision, he would be owed an additional 30 days of his wages as damages.

ISSUE: Which state governs the employee's claim for final wages?

DECISION: Maine state law governed the employee's claim for final wages and the employee was owed his wages plus damages, a federal appeals court ruled.

The original contract did not cover the change in the incentive plan and no contract resolved the choice-of-law issues, the court said. The court considered Maine's law but found it provided “no certain answer.”

The court consulted a restatement of legal subjects produced by the American Law Institute that offers insight for judges and lawyers. One subdivision, Section 196, resolves choice-of-law issues in the absence of a clear resolution by the employee and employer. The section “looks primarily to where the party rendering services renders those services, not to where the party paying for the services operates,” the court said. It rejected the employer's argument that the California choice-of-law provision was triggered because its obligations were performed in California.

Although Maine does not expressly follow Section 196, the nature of the state's law matched the section's focus on the place where the employee performed services, the court said. The court took into account Section 626 of Maine's wage-payment law and its “intent to protect employees from employers who fail to pay wages,” the court said.

“We doubt that Maine's highest court would find that a company procuring services from a Maine resident performed mostly in Maine can avoid compliance with Maine's fair wage laws merely because the company procuring the services conducts its own operations outside of Maine,” the court said (Dinan v. Alpha Networks, Inc.,2014 BL 2307552, 1st Cir., No. 13-1976, 8/20/14).

POINTERS:Under Maine law, employers must pay wages to discharged employees or employees who quit on the next regular payday or within two weeks upon demand, whichever is earlier. Under California law, employers must pay wages at the time they discharge employees. They must pay employees who give 72 hours' advance notice of their intention to quit and who quit on the day given in the notice when the workers end their employment.

For more information see PAG's “Maine Payment on Termination” and “California Payment on Termination” chapters.

This analysis illustrates how courts resolve pay-related disputes. The names and dialogue are fictitious.