The Connecticut Supreme Court today ruled (in a decision that will be "officially released" on June 24, 2008) that an agreement between an employer and his employees to defer an employee’s past wages until the employer receives revenue sufficient to pay those wages, is contrary to public policy , therefore, an invalid defense in a criminal prosecution for failure to pay wages.

The case, State of Connecticut v. Lynch (available here) is somewhat unusual because there are not very many criminal prosecutions of a failure to pay wages. Most cases arise in the civil context. But not here.  Here, the employer failed to pay wages for several pay periods and then tried to get employees to agree that their back wages and future wages would be contingent on future revenue of the company.

You may recall a case a few months ago  Ravetto v. Triton Thalassic Technologies (discussed in this earlier post)  which held than an agreement to defer accural of wages in the future does not violate public policy.  Indeed, back then, the court noted:

We cannot conclude as a matter of law, however, that an employer experiencing financial hardship that honestly informs employees that it cannot meet payroll and that does not promise them that future payment will be made is acting unreasonably when it allows employees to continue to work with the hope of future payment. This is particularly true where the employees are experienced business people and members of management who choose to continue working in the hope that their services to the employer will improve the financial status of the company. We can imagine circumstances in which such a choice by employees may inure to their benefits particularly when the financial hardship is short-lived and the financial status of the company ultimately improves. In the present case, we recognize that Triton ultimately did pay the plaintiffs the wages that were due them.

So, what’s the difference here? Here, the Court says that the Agreement at issue applied by prospectively but also retroactively and as such, violated public policy. In fact, at the time that the employer proposed this "agreement", the employer had already missed several payroll periods.  Thus, the Court said that an agreement to postpone accural of wages violates public policy when applied retroactively.  In the absence of an agreement on when wages accrue, it’s safe to assume that they accrue when the employee performs work.

What’s the takeaway for employers from this case? First and foremost, keep up with obligations of payroll.  In the extreme case, the Connecticut Department of Labor can and will file criminal charges against employers that fail to keep up. Failure to pay wages is not one of those "grey" areas. Set up a payroll system and stick to it.

But if the company begins getting cash flow problems, it may consider setting up agreements with employees that may make payment future wage payments contingent on revenue.  This often happens in small, start-up ventures where the work is being done ahead of revenue coming in the door. 

These agreements will be heavily scrutinized so getting sound legal advice on this issue (as many others) should help ensure that the agreement will hold up later on.  The Court took great pains to note that agreements on when the employee accrues wages may be okay, but employers should still tread carefully because of the important public policy of paying employees wages "on time".