Insurers May Be Required to Pay Treble Damages on Behalf of their Massachusetts Insureds Under MA Wage Act
In Massachusetts, all violations of the state’s wage and hour laws are subject to mandatory treble damages, even when employers have acted in good faith. This treble-damage law, which went into effect in July 2008, has spawned numerous class action and individual suits. Insurers operating in Massachusetts should be aware that a 2012 Massachusetts federal court has held that these mandatory treble damages are not punitive in nature, and therefore may be covered by a D&O policy even if the policy excludes coverage for punitive damages.
In The Kittansett Club and Stephen F. Gormley v. Philadelphia Indemnity Insurance Co, Civ. Action No. 11-11385-DJC, the wait staff of the Kittansett golf club (the Club) sued the Club for failing to distribute the 18% gratuity added to its food and drink bills to the staff who actually served the food and drinks. The Club instead allegedly kept the money for itself, or distributed it to management and other employees, in violation of the Massachusetts Wage Act, Mass. Gen. L. c. 149, Sec. 152A. The Club settled the case against it, and then sued its D&O insurer Philadelphia Indemnity Insurance Co. (Philadelphia Indemnity) for failing to defend the Club and pay indemnity.
In a decision dated September 10, 2012, Judge Casper held that the wait staff’s damages as a result of their lost tips were restitutionary in nature and not covered by the policy. Philadelphia Indemnity then argued that the statutory treble damages, attorney’s fees and costs were also not covered because those payments are penalties and thus excluded from the policy’s definition of loss.
The Court disagreed. The Massachusetts Wage Act states that any “employee . . . who prevails in such an action shall be awarded treble damages, as liquidated damages, for any lost wages and other benefits and shall also be awarded the costs of litigation and reasonable attorneys’ fees.” Mass Gen. L. c. 149, sec. 150. The Court found that the treble damages in this provision are liquidated compensatory damages that are separate from the scheme of “civil and criminal penalties” set forth in Mass Gen. L. c. 149, sec. 27C.
Citing an 11th Circuit case regarding the FLSA, the Court found that the treble damages provision “was not penal in nature but constitutes compensation for the retention of a workman’s pay which might result in damages too obscure and difficult of proof for estimate other than by liquidated damages.” Snapp v. Unlimited Concepts, Inc., 208 F.3d 928, 935 (11th Cir. 2000). The Court held that attorney’s fees and costs also are inherently compensatory. Accordingly the Court found that the non-restitutionary component of the parties’ financial settlement would not be excluded as “penalties” under the definition of loss.
This holding is dicta because the policy contained an “Earned Wages” exclusion that excluded claims “relating to, arising out of, based upon, or attributable to the refusal, failure or inability of any Insured(s) to pay Earned Wages.” Although the Kittansett Club argued that the term “wages” does not include gratuities, the Court disagreed, and found that the exclusion barred coverage for all of the Club’s damages, including the treble damages component. Although dicta, we believe Judge Casper’s holding that the treble damages awarded under the Massachusetts Wage Act are not punitive is likely to be upheld, given the statutory language of the Act.
 Other dictum in the case is also interesting. Philadelphia Indemnity argued that the Club’s failure to pay wages to its employees was not a “Wrongful Act” under the policy, but rather was a violation of a preexisting statutory duty. The Court disagreed, stating that the allegations fell squarely within the definition of Wrongful Act, and that under Philadelphia Insurance’s logic, no violation of law would ever be a Wrongful Act, as there would always be preexisting duty to follow the law.
But this conclusion did not mean that the Club could ignore its statutory obligations by shifting costs to its insurer, because the resulting loss caused by not paying the tips was not “for” the D&O Wrongful Act, as required for coverage under the policy. The Court stated that while the failure to pay the wages may be a Wrongful Act, the obligation to pay back wages was not a Loss “arising from that wrongful act because the obligation to pay arose from the statute and predated the wrongful act.”
For more information regarding this alert, please contact Karen Mariscal in our Boston office at 617.748.5225 or firstname.lastname@example.org.