Potential Draconian Penalties Imposed Under Massachusetts Law on Start Ups

Joseph W. Bartlett, Special Counsel, McCarter & English, LLP

February 2008

Potential Draconian Penalties Imposed Under Massachusetts Law on Start ups Which Enter Into Arrangements With Employees, Regardless of How Senior, Which Defer or Waive Payment Of The Minimum Wage.

According to an alarming heads up by Ronan O'Brien and Kristin McGurn, of Seyfarth Shaw, there is an extraordinary trap for the unwary in Massachusetts (also known as 'Taxachusetts'), the State Payment of Wages Act. The article appears in the October 2007 Venture Capital Journal, p. 34 "Don't Allow Start Up Execs to Forfeit Salaries."

Assume a typical hypothetical. A pre-revenue start up, yet to raise its friends and family and/or angel round, is staffed by the founder and two other friends of the founder who, in consideration of full time service, have been granted equity positions in hopes that the company will turn into what is known in the trade these days as a "gazelle" . a company which will (or, better, may) successfully navigate the trip from "the embryo to the IPO." Expenses which cannot be avoided are being paid by the founder through nimble use of his or her credit cards and nobody is drawing a salary. According to the cited piece, the Massachusetts courts have held that failure to pay the minimum wage, which is at least $455 a week to each of the founder's two colleagues, and perhaps to the founder him/herself, will subject the responsible individuals . i.e., the founder and presumably any board members recruited by the founder . not only to civil but also to criminal penalties. Indeed, quoting the article,

"at least one Massachusetts judge also held an outside investor who assumed certain management functions personally liable for unpaid wages. A companion statute governing penalties for violation of the wage statues also imposes criminal penalties on the company and certain officers. Liable offices face fines and imprisonment for willful offenses . ."

Well, the obvious question is as follows: Does this mean that, if a founder does not have the requisite resources and needs a little help from his or her friends, as they say, Massachusetts is not the appropriate venue for the start up? It would appear, absent further clarification or action by the Massachusetts legislature, that such may well be the case.

Comments? I am a member of the Massachusetts Bar but I have not independently researched this issue. Other states to worry about?

Joseph W. Bartlett, Special Counsel,

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