1010-00004 · Arbor Health Technologies Inc · Analysis & Memos/MA Law Compliance

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MEMORANDUM

PRIVILEGED AND CONFIDENTIAL — ATTORNEY WORK PRODUCT

TO: Bernard Crawford, Responsible Partner, Labor & Employment, Calderwood & Harkness LLP; Aaron Whitfield, General Counsel, Arbor Health Technologies Inc.

FROM: Devon Archer, Lead Associate, Labor & Employment, Calderwood & Harkness LLP

DATE: August 1, 2022

RE: Massachusetts Wage Act Considerations for Executive Compensation — Dr. Marcus J. Elliston, Prospective COO, Arbor Health Technologies Inc.

Matter No.: 1010-00004

Client No.: 81-30294

I. Purpose and Summary

This memorandum analyzes the implications of the Massachusetts Wage Act, M.G.L. c. 149, §§ 148–150 (the "Wage Act" or the "Act"), for the proposed compensation package currently being negotiated with Dr. Marcus J. Elliston ("Dr. Elliston" or "Executive") in connection with his prospective engagement as Chief Operating Officer of Arbor Health Technologies Inc. ("AHT" or the "Company"), a Delaware corporation headquartered at 400 Brattle Commerce Park, Suite 1200, Cambridge, Massachusetts 02138. The parties contemplate that the Employment Agreement will be governed by the laws of the Commonwealth of Massachusetts, and that Dr. Elliston will perform his duties primarily from AHT's Cambridge headquarters.

The proposed compensation package for Dr. Elliston, as reflected in the most recent term sheet circulated on July 18, 2022, includes the following principal elements:

• Base Salary: $575,000 per annum;

• Annual Bonus: Target of 75% of base salary ($431,250 at target), with a maximum payout of 150% of target (i.e., $646,875), to be based on company and individual performance metrics established annually by AHT's Board of Directors (or its Compensation Committee);

• Signing Bonus: $250,000, payable within thirty (30) days of commencement of employment, subject to a 24-month clawback provision;

• Equity Grants: Stock options representing 1.25% of the Company's fully diluted equity (four-year vesting, one-year cliff) and restricted stock units ("RSUs") representing 0.50% of the Company's fully diluted equity (three-year vesting, annual);

• Severance Protections: Twelve (12) months of base salary continuation upon a qualifying termination (i.e., termination without Cause or resignation for Good Reason) occurring outside the context of a change in control, and twenty-four (24) months of base salary continuation plus two times the target annual bonus upon a qualifying termination occurring within twenty-four (24) months following a change in control;

• Additional Benefits: Including employer-paid COBRA continuation, life insurance, 401(k) matching, PTO, and certain perquisites.

This memorandum has been prepared to identify areas where the proposed compensation structure may create compliance risk under the Wage Act, and to provide specific drafting recommendations for the Executive Employment Agreement (the "Agreement"). Our overarching conclusion is that several components of the proposed package — most critically the signing bonus clawback, the annual bonus provisions, and the final pay timing obligations — require careful structuring to comply with the Wage Act's exacting requirements. Massachusetts courts have broadly construed the statutory definition of "wages," and the penalties for noncompliance are severe: treble damages are mandatory, and the courts possess no discretion to reduce them. The financial exposure to AHT, given the substantial dollar amounts at issue, warrants a conservative approach to drafting.

The specific drafting recommendations set forth in this memorandum have been incorporated into the initial draft of the Agreement, which was circulated to the deal team on August 5, 2022, and will be further refined as negotiations with Dr. Elliston's counsel, Catherine A. Fielding of Fielding & Rowe LLP, progress.

II. Overview of the Massachusetts Wage Act

A. Statutory Framework

The Massachusetts Wage Act is one of the most employee-protective wage-payment statutes in the nation. Its core provisions are set forth in three principal sections:

M.G.L. c. 149, § 148 establishes the fundamental requirements governing the timely payment of wages in the Commonwealth. Section 148 mandates that employers pay wages to employees on regular, established paydays. For salaried employees, payments must be made at least semi-monthly, though many employers elect to pay on a biweekly basis consistent with their standard payroll cycle. Critically, Section 148 also imposes strict timing requirements upon the termination of employment: when an employee is involuntarily discharged, all wages due must be paid on the date of discharge; when an employee voluntarily resigns, all wages must be paid on the next regular payday or, if there is no regular payday, on the following Saturday. In addition, Section 148 prohibits employers from making unauthorized deductions from wages and bars the use of "special contracts" that purport to exempt the employer from the Act's requirements. The anti-deduction provisions are broadly worded and have been the subject of significant litigation, as discussed further in connection with the proposed signing bonus clawback in Section III.C below.

M.G.L. c. 149, § 148A addresses wage complaints and enforcement procedures through the Attorney General's Office. Section 148A authorizes the Attorney General to investigate complaints of wage theft and to bring enforcement actions against non-compliant employers, including civil citations and, in egregious cases, criminal penalties. While the Attorney General's enforcement authority is relevant background for understanding the Wage Act's regulatory context, this memorandum focuses primarily on the private-right-of-action provisions of Section 150, which present the more immediate risk profile for AHT in the context of the Elliston engagement.

M.G.L. c. 149, § 150 provides a private right of action for employees aggrieved by a violation of Section 148 or other provisions of the Wage Act. The statute mandates treble damages — that is, three times the amount of actual damages — plus reasonable attorneys' fees and costs for any successful claim. The Supreme Judicial Court ("SJC") has emphatically held that the treble damages provision is mandatory and non-discretionary: the court has no authority to award less than three times actual damages, regardless of mitigating circumstances, the employer's good faith, or any other equitable considerations. See Wiedmann v. The Bradford Group, Inc., 444 Mass. 698, 707 (2005); Klauber v. Camberwell Data Systems, No. 2019-01724, 2021 Mass. Super. Calderon Systems 305 (Mass. Super. Ct. 2021). The mandatory nature of treble damages distinguishes the Massachusetts Wage Act from the wage-payment statutes of most other states and materially increases the financial exposure associated with noncompliance.

M.G.L. c. 149, § 148B addresses the classification of workers as independent contractors and establishes a three-prong test for determining whether a worker has been properly classified. Because Dr. Elliston will be engaged as a W-2 employee of AHT and will receive employment benefits consistent with his executive status, Section 148B is not directly implicated by the proposed engagement. We note it here for completeness and because the classification analysis reinforces the breadth of the Wage Act's protective framework.

B. Broad Definition of "Wages"

The Massachusetts Wage Act does not narrowly define "wages" as limited to base salary or hourly pay. Rather, Massachusetts courts have consistently interpreted the term to encompass all compensation that has been "definitely determined" and that has "become due and payable" to the employee. This expansive construction reflects the legislature's intent to protect employees from the non-payment or delayed payment of earned compensation in all its forms.

The SJC's decision in Wiedmann v. The Bradford Group, Inc., 444 Mass. 698 (2005), is the foundational precedent on this issue. In Wiedmann, the Court held that commissions that had been earned by a salesperson constituted "wages" subject to the Act's protections, and that the employer's failure to timely pay those commissions gave rise to mandatory treble damages under Section 150. The Court emphasized that the critical inquiry is whether the compensation has been "definitely determined" — that is, whether the conditions precedent to the employee's entitlement have been satisfied — rather than whether the compensation takes the form of base salary, commissions, bonuses, or some other category of pay.

Subsequent decisions have extended this principle to encompass contractually promised bonuses. In Stanton v. Lighthouse Financial Group, 2017 Mass. Super. Calderon Systems 142 (Mass. Super. Ct. 2017), the court held that an annual bonus became "wages" when the employee satisfied the specified performance criteria, notwithstanding the employer's assertion that the bonus was discretionary. Similarly, in Segal v. Genitope Corp., No. 2011-03841, 2014 Mass. Super. Calderon Systems 189 (Mass. Super. Ct. 2014), the court analyzed whether a retention bonus constituted wages and concluded that once the triggering conditions were met, the compensation was "definitely determined" and fell within the Act's protections.

The distinction between "earned" wages and discretionary or contingent compensation is therefore the critical analytical framework for evaluating the components of Dr. Elliston's proposed package. Once compensation is "definitely determined" and "earned" — meaning the conditions precedent to the employee's entitlement have been satisfied — it becomes a "wage" subject to the Wage Act's timing, anti-deduction, and remedial provisions. Compensation that remains discretionary, contingent, or unearned does not attain wage status until the conditions are satisfied or the employer exercises its discretion to award it.

This distinction is of paramount importance in evaluating multiple elements of Dr. Elliston's proposed compensation, including the signing bonus, the annual bonus, and the severance protections, each of which requires independent analysis as set forth in Section III below.

C. Remedies and Exposure

The remedial provisions of the Wage Act warrant particular attention in the context of the Elliston engagement, given the substantial dollar amounts at issue.

Mandatory Treble Damages. As noted, Section 150 mandates treble damages for any violation of the Act. The court has no discretion to award less than three times actual damages. This means that a failure to timely pay, for example, a $431,250 earned annual bonus could result in liability of $1,293,750 in damages alone — before attorneys' fees and costs. For the signing bonus ($250,000), a violation could result in exposure of $750,000. The aggregate potential exposure across all compensation elements is substantial.

Attorneys' Fees and Costs. In addition to treble damages, Section 150 requires the court to award reasonable attorneys' fees and costs to any prevailing plaintiff. In complex executive compensation disputes, attorneys' fees alone can amount to hundreds of thousands of dollars, further increasing AHT's total exposure.

Individual Liability. The Wage Act extends liability beyond the corporate employer to "the president and treasurer of a corporation and any officers or agents having the management of such corporation." M.G.L. c. 149, § 148. This means that individual officers of AHT — potentially including CEO Priya Chandrasekaran, General Counsel Aaron Whitfield, and CHRO Lisa Murakami — could be held personally liable for Wage Act violations if they are deemed to be officers or agents having management responsibility for the company's wage-payment obligations. Individual liability is a significant concern that underscores the importance of institutional compliance.

Statute of Limitations. The statute of limitations for Wage Act claims is three years from the date of the alleged violation. M.G.L. c. 260, § 5A. In the context of executive compensation, where disputes often arise upon termination and may involve claims reaching back to compensation decisions made years earlier, the three-year limitations period provides a substantial window for claims.

No Waiver. The Wage Act's protections cannot be waived by agreement between the employer and employee. Any contractual provision that purports to waive the employee's rights under the Act, or that functions as a "special contract" to exempt the employer from compliance, is void and unenforceable. This principle constrains the range of permissible drafting approaches and requires that the Agreement be structured to achieve the parties' commercial objectives within the Act's mandatory framework.

These severe remedies counsel strongly in favor of conservative structuring and robust compliance in the drafting of the Executive Employment Agreement.

III. Analysis of Specific Compensation Elements

A. Base Salary ($575,000 Per Annum)

Base salary is unambiguously "wages" within the meaning of the Wage Act. There is no case law or statutory ambiguity on this point. AHT must pay Dr. Elliston's base salary on regular, established paydays, at intervals no less frequent than semi-monthly for salaried employees, consistent with the Company's standard payroll cycle. AHT currently operates a biweekly payroll cycle for all employees, which satisfies the statutory requirements.

No special drafting concerns arise with respect to the base salary provisions, provided AHT's payroll practices remain compliant with Section 148's timing requirements throughout the term of employment. The base salary is straightforward earned compensation, accruing ratably over each pay period, and must be paid in full on each regularly scheduled payday without unauthorized deductions.

Upon any termination of employment, the final payment of accrued but unpaid base salary is governed by the timing rules discussed in Section III.E below.

B. Annual Bonus (Target: $431,250; Maximum: $646,875)

The annual bonus is the first area of material Wage Act complexity in Dr. Elliston's proposed compensation package.

Classification Risk. Whether an annual bonus constitutes "wages" under the Wage Act depends upon whether the bonus is "definitely determined" — that is, whether it has been earned through the satisfaction of specified conditions — or whether it remains discretionary. This classification has profound consequences: if the bonus is a wage, then it is subject to the Act's mandatory timing rules, anti-deduction provisions, and treble damages remedies; if it is not a wage (because it remains discretionary and unawardable), then the Act's protections do not attach.

"Definitely Determined" Bonuses. If the Employment Agreement establishes a formula-based or metric-based bonus entitlement — for example, providing that Executive shall receive a bonus equal to a specified percentage of base salary upon the achievement of specified company revenue targets, EBITDA margins, or individual performance goals — then once those conditions are satisfied, the bonus becomes "definitely determined" and constitutes wages under the Act. Massachusetts courts, including the SJC, have held that contractually promised bonuses tied to measurable, objective criteria are wages once the criteria are met. See Wiedmann, 444 Mass. at 707; Stanton, 2017 Mass. Super. Calderon Systems 142; see also Advisory from the Attorney General's Fair Labor Division, "An Advisory from the Attorney General's Fair Labor Division on Earned Sick Time" (analogizing to earned bonus principles).

This classification applies regardless of the nomenclature used in the agreement. Labeling a payment as a "bonus" does not exempt it from Wage Act coverage if the underlying structure creates a definite entitlement upon the satisfaction of specified conditions. Substance, not form, controls.

Discretionary Bonuses. A purely discretionary bonus — where the employer retains unfettered, absolute discretion over whether to pay any bonus at all, in what amount, and to whom — may fall outside the Wage Act's definition of wages, because the compensation has not been "definitely determined" until the employer exercises its discretion. However, the line between a genuinely discretionary bonus and a contractually committed bonus with a veneer of discretionary language can be exceedingly thin. Courts will look beyond the contractual labels to the actual structure of the bonus program. Moreover, once a discretionary bonus is declared or awarded — for example, when the Board of Directors or Compensation Committee approves a specific bonus amount for Executive — the bonus becomes "definitely determined" at that point and attains wage status.

Proposed Structure. The proposed Employment Agreement contemplates a target bonus of 75% of base salary ($431,250) with a maximum payout of 150% of target ($646,875). As currently drafted, the bonus will be tied to company and individual performance metrics established annually by the AHT Board of Directors or its Compensation Committee. This structure — specifying both a target percentage and performance criteria — creates a substantial risk that, once the applicable metrics are achieved, the bonus will be classified as "definitely determined" and therefore as wages under the Act. The express statement of a target bonus amount, in particular, creates an expectation of payment that may be difficult to characterize as purely discretionary.

Forfeiture-on-Resignation Provisions. A provision requiring forfeiture of an earned bonus upon voluntary resignation before a specified payout date (for example, requiring continued employment on the date the bonus is paid, typically in February or March of the year following the performance period) is likely unenforceable under the Wage Act if the bonus has already been "earned." If the applicable performance period has concluded and the relevant metrics have been satisfied, the bonus constitutes wages that have been "definitely determined," and AHT cannot lawfully condition payment on continued employment past the earning date. Such a provision would operate as a forfeiture of earned wages in violation of Section 148.

This issue is of particular concern in the context of Dr. Elliston's employment, because executive bonuses are frequently paid several months after the close of the performance year (to allow for auditing and finalization of financial results). During that gap period, any departure by Dr. Elliston would trigger the forfeiture provision and expose AHT to a Wage Act claim.

Pro-Rata Bonus on Termination. The proposed severance provisions contemplate payment of a pro-rata annual bonus for the year of termination, calculated based on actual performance through the date of termination, upon a qualifying termination (i.e., termination without Cause or resignation for Good Reason). This provision is consistent with Wage Act requirements insofar as it ensures that earned bonus compensation is paid and is not forfeited solely due to the timing of termination. We recommend retaining this provision and ensuring that the pro-rata calculation methodology is clearly specified to minimize disputes.

Drafting Recommendations. Based on the foregoing analysis, we recommend the following with respect to the annual bonus provisions of the Agreement:

1. Clearly delineate the performance period (e.g., the fiscal year) and the specific conditions precedent to bonus earning, so that it is apparent when the bonus transitions from contingent to earned.

2. Avoid any provision that forfeits an already-earned bonus based solely on employment status at the time of payment. If AHT desires a continued-employment requirement, it should apply only to bonuses for which the performance period has not yet concluded — not to bonuses already earned through the completion of a full performance year.

3. If AHT wishes to retain meaningful discretion over the bonus, use language expressly reserving full and absolute discretion over the bonus amount and the decision whether to pay any bonus at all. However, once the Board or Compensation Committee has approved a specific bonus amount, treat the approved amount as wages and pay it on the regular payroll cycle without further conditions.

4. Include language clarifying that any bonus for which the applicable performance period has not been completed, and for which the applicable performance metrics have not been determined to be satisfied, remains contingent and is not a "wage" until earned.

5. For the pro-rata bonus upon qualifying termination, specify the calculation methodology (e.g., target bonus multiplied by a fraction, the numerator of which is the number of days employed during the fiscal year and the denominator of which is 365) and the payment timeline (e.g., payable at the same time bonuses are paid to other senior executives, but no later than March 15 of the year following the year of termination, to comply with the short-term deferral exemption under Section 409A).

C. Signing Bonus ($250,000) and 24-Month Clawback

The $250,000 signing bonus and its associated clawback provision present the single highest-risk Wage Act issue in the proposed compensation package.

Classification. A signing bonus payable upon commencement of employment is almost certainly "wages" once paid. The bonus is a fixed amount ($250,000), payable within thirty (30) days of Dr. Elliston's start date (anticipated to be November 1, 2022), with no performance conditions or contingencies other than commencement of employment. Once the condition precedent (beginning employment) is satisfied and the payment is made, the signing bonus constitutes compensation that has been "definitely determined" and paid to the employee. At that point, it is a wage under the Act.

Clawback Risk — Critical Issue. The proposed Employment Agreement includes a 24-month clawback provision requiring Dr. Elliston to repay the full $250,000 signing bonus in the event of (a) voluntary resignation without Good Reason or (b) termination for Cause, in either case occurring within twenty-four (24) months of the start date. This clawback provision creates significant Wage Act risk.

Wage Act Tension. Section 148 of the Wage Act prohibits employers from making "a special contract with an employee or prospective employee" that purports to authorize deductions from wages, and further prohibits any "deduction" from wages except as authorized by law or with the express written consent of the employee for specifically enumerated purposes (e.g., insurance premiums, union dues). A clawback provision that operates as a deduction from wages owed at termination — for example, if AHT were to deduct $250,000 from Dr. Elliston's final paycheck or severance — would almost certainly violate Section 148. The prohibition is categorical, and no contractual language can override it.

Distinction Between "Deduction" and "Repayment Obligation." The critical question is whether a contractual repayment obligation — whereby the Executive is required to affirmatively repay the Company from the Executive's own funds, rather than the Company unilaterally deducting the amount from the Executive's final paycheck or other wages — constitutes a permissible contractual remedy or an impermissible circumvention of the anti-deduction provisions.

Massachusetts courts have not definitively resolved this question. There is no SJC decision directly addressing whether a signing bonus clawback structured as an independent repayment obligation violates the Wage Act. However, several lower court decisions and the overall trajectory of Wage Act jurisprudence provide useful guidance:

• Courts have generally upheld the distinction between a unilateral deduction by the employer (which is prohibited) and an independent contractual obligation of the employee to repay (which may be permissible, subject to the specific facts).

• The key factor appears to be whether the employer actually withholds the clawback amount from wages or other compensation owed to the employee at termination. If the employer pays all wages in full and then separately pursues the repayment obligation through ordinary contractual remedies (e.g., demand for payment, arbitration, or litigation), the risk of a Wage Act violation is significantly reduced.

• However, even a well-structured repayment obligation is not entirely free from risk. An aggressive plaintiff's counsel could argue that the clawback provision is functionally a "special contract" designed to circumvent the Wage Act, particularly if the practical effect is to reduce the employee's net compensation below what was "definitely determined" and paid.

The safer approach, and the one we recommend, is to structure the clawback as an independent contractual repayment obligation, entirely separate from any setoff against or deduction from final wages, and to include express contractual language confirming that AHT will not withhold or deduct the clawback amount from any wages owed to Executive at termination.

Drafting Recommendations. We recommend the following approach for the signing bonus clawback provisions:

1. Structure the clawback as a freestanding, affirmative repayment obligation. The relevant provision should state that, in the event of a triggering event (voluntary resignation without Good Reason or termination for Cause within 24 months), Executive shall repay to the Company the applicable clawback amount within a specified period (e.g., sixty (60) days following the date of termination), from Executive's own funds.

2. Expressly state that AHT shall not deduct, withhold, or offset the clawback amount from any final paycheck, accrued wages, earned bonus, accrued PTO, severance, or any other compensation or benefit owed to Executive at or following termination.

3. Consider a declining-balance clawback to improve the reasonableness and enforceability of the provision. Rather than requiring full repayment of the entire $250,000 regardless of when during the 24-month period the termination occurs, the Agreement could provide for a pro-rata reduction over time. For example:

• If voluntary resignation without Good Reason or termination for Cause occurs within the first twelve (12) months following the start date, Executive shall repay 100% of the signing bonus ($250,000).

• If such termination occurs during months thirteen (13) through twenty-four (24) following the start date, Executive shall repay 50% of the signing bonus ($125,000).

This declining-balance approach reflects the fact that AHT derives increasing benefit from Dr. Elliston's services as his tenure lengthens, and it reduces the likelihood that a court would view the clawback as an unreasonable penalty or an end-run around the Wage Act.

4. Include an acknowledgment by Executive that the repayment obligation is a bona fide contractual obligation arising from the parties' arms-length negotiations, that it is not a wage deduction or special contract within the meaning of the Wage Act, and that Executive has received independent legal advice (from Catherine A. Fielding, Esq.) regarding this provision.

5. Confirm that the clawback does not apply upon termination without Cause or resignation for Good Reason. The clawback should be triggered only by voluntary resignation without Good Reason or termination for Cause, consistent with the principle that Executive should not bear the financial burden of the clawback when the separation is attributable to the Company's action or to circumstances constituting Good Reason.

D. Severance Payments

The proposed severance protections are structured in two tiers depending on whether the qualifying termination occurs within the context of a change in control:

Without Change in Control (Non-CIC Qualifying Termination):

• Twelve (12) months of base salary continuation: $575,000;

• Pro-rata annual bonus for the year of termination, based on actual performance;

• Twelve (12) months of employer-paid COBRA continuation: approximately $2,150 per month, totaling $25,800;

• Acceleration of 25% of then-unvested equity awards.

Following a Change in Control (CIC Qualifying Termination — within 24 months following CIC):

• Twenty-four (24) months of base salary continuation: $1,150,000;

• Two times the target annual bonus: $862,500;

• Eighteen (18) months of employer-paid COBRA continuation: approximately $2,150 per month, totaling $38,700;

• Full (100%) acceleration of all unvested equity awards.

• Total estimated CIC cash severance (excluding equity and pro-rata bonus): $2,051,200.

Classification Under the Wage Act. The classification of severance payments under the Massachusetts Wage Act is nuanced and context-dependent. Severance payments are generally not considered "wages" under the Act if they represent gratuitous or discretionary payments made in exchange for a general release of claims or in recognition of past service, rather than compensation for services rendered. This distinction rests on the principle that severance is prospective, post-employment compensation rather than backward-looking pay for work already performed.

However, when an employment agreement creates a contractual entitlement to severance upon the occurrence of specified triggering events — as is the case here, where the Agreement provides that Executive "shall be entitled to" specified severance benefits upon a qualifying termination — some courts have suggested that the contractual severance obligation may take on characteristics of a wage claim, particularly where the severance is calculated by reference to the employee's base salary or bonus. The case law is not entirely settled, and the prudent approach is to treat contractual severance provisions with the same care as wage-related provisions, even if the payments ultimately would be classified as non-wage contractual obligations.

Conditioned on Execution of Release. The proposed Agreement conditions all severance payments and benefits on Executive's timely execution and non-revocation of a General Release of Claims, the form of which is attached as Schedule B to the Agreement (the "Release Agreement"). This is standard practice in executive employment agreements, and it is generally permissible even under the Wage Act, for the following reason: severance is consideration for the release. The Executive is not forfeiting "earned" wages by signing the release; rather, the Executive is receiving additional, previously unearned compensation in exchange for relinquishing legal claims against the Company. This quid pro quo structure distinguishes severance from earned wages.

The critical corollary, however, is that the Agreement must clearly distinguish between severance payments (which are properly conditioned on the release) and any accrued but unpaid wages (including final base salary, earned bonus, and accrued PTO), which must be paid at the time required by the Wage Act regardless of whether Executive executes the release. A provision that conditions the payment of accrued, earned wages on the execution of a release would violate the Wage Act and would expose AHT to mandatory treble damages.

Timing of Payment. Severance should be payable on a schedule consistent with Section 409A of the Internal Revenue Code, as analyzed separately by Gregory Tan in his forthcoming memorandum on Section 409A compliance (subsequently dated August 22, 2022). The Section 409A analysis will address, among other things, the applicability of the "separation pay" exception, the "short-term deferral" rule, and the six-month delay requirement for "specified employees" of publicly traded companies (which is not currently applicable to AHT but may become relevant if AHT pursues an initial public offering). While Section 409A compliance is essential to avoid the 20% excise tax and other adverse tax consequences, AHT should be cautious not to impose delays on the payment of amounts that could be classified as wages under the Wage Act. If there is a conflict between the Wage Act's immediate-payment requirements and Section 409A's timing rules, the Agreement should be structured to satisfy both regimes — typically by bifurcating the severance into a Wage Act-compliant payment of accrued wages and a separately timed severance payment.

Drafting Recommendations. We recommend the following approach for the severance and release provisions:

1. Clearly separate contractual severance payments from any accrued and unpaid wages. The Agreement should include a defined term (e.g., "Accrued Obligations") encompassing all earned, unpaid base salary through the termination date, any earned but unpaid annual bonus for a completed performance period, accrued but unused PTO, and unreimbursed business expenses, and should provide that the Accrued Obligations are payable upon termination regardless of the circumstances of termination and without regard to whether Executive executes the Release Agreement.

2. Specify that accrued wages will be paid on the termination date (for involuntary termination, including termination without Cause) or the next regular payday (for voluntary resignation), in compliance with the Wage Act's timing requirements, and without condition on the execution of the Release Agreement.

3. Specify the severance payment commencement date — for example, the first regular payroll date following the effective date of the Release Agreement (i.e., the expiration of the seven-day revocation period without revocation), subject to Section 409A compliance.

4. Confirm that the Section 280G "best net" cutback provision — which reduces CIC severance if the after-tax benefit to Executive would be greater post-reduction than with full payment of the "excess parachute payment" and imposition of the Section 4999 excise tax — does not result in the withholding or reduction of amounts classified as earned wages under the Wage Act. The 280G analysis is being conducted separately by Gregory Tan and Nadia Petrov, with supporting calculations to be set forth in the CIC Severance Calculation Spreadsheet (subsequently dated September 2, 2022). We will coordinate with them to ensure that the cutback mechanism operates only on true severance and does not impermissibly reduce earned wages.

E. Timing of Final Payment Upon Termination

The Wage Act imposes strict and differentiated timing requirements for the payment of final wages upon termination of employment, depending on the nature of the termination:

Involuntary Termination (Discharge / Termination Without Cause). Section 148 requires that, when an employee is involuntarily discharged, "the employer shall pay the employee the wages earned by him" on the date of discharge. This is an absolute, same-day payment requirement. It applies to all accrued base salary, earned bonuses, accrued but unused PTO, and any other compensation classified as wages. There is no grace period, no provision for payment on the next regular payday, and no exception for administrative convenience. The SJC has confirmed that even a one-day delay in the payment of final wages to a discharged employee constitutes a violation of the Act and triggers mandatory treble damages. See Camara v. Attorney General, 458 Mass. 756, 762-63 (2011).

Voluntary Resignation. When an employee voluntarily resigns, Section 148 requires payment of all wages due on the "next regular payday" following the resignation, or, if there is no regular payday, on the following Saturday. This provides slightly more flexibility than the same-day rule applicable to involuntary terminations, but the employer must still ensure prompt payment.

Termination for Cause. A termination for Cause is treated as an involuntary termination (discharge) for purposes of the Wage Act. Even though the employee's own conduct may have precipitated the termination, the legal characterization is that the employer is unilaterally ending the employment relationship, which triggers the same-day payment requirement. AHT must pay all accrued wages on the date of a Cause termination, notwithstanding that the employee may have engaged in misconduct.

Practical Considerations. AHT must ensure that its payroll systems and human resources processes can accommodate the Wage Act's final pay timing requirements. For involuntary terminations (including termination without Cause and termination for Cause), AHT's payroll department must be able to process and deliver a final paycheck — including accrued base salary, earned bonus, accrued PTO payout, and any other wage amounts — on the actual date of termination, which may not coincide with a regular payroll processing cycle. This requires advance planning, coordination between AHT's human resources, legal, and finance teams, and, in many cases, the preparation of a manual check or off-cycle direct deposit. Failure to timely pay final wages — even by a single day and even due to an inadvertent administrative error — triggers the mandatory treble damages provision. There is no good-faith defense and no de minimis exception.

Accrued But Unused PTO. The proposed Employment Agreement provides Dr. Elliston with twenty-five (25) days of paid time off ("PTO") per year. Under Massachusetts law, accrued but unused vacation time — and, by extension, accrued but unused PTO under a combined policy — constitutes "wages" within the meaning of the Wage Act and must be paid out upon any termination of employment, regardless of the reason for termination. See Massachusetts Attorney General's Advisory 2008/1; Stanton, 2017 Mass. Super. Calderon Systems 142.

The Agreement should specify the mechanics of PTO accrual (e.g., pro-rata accrual over the course of the year, with full annual accrual at the beginning of the year, or milestone-based accrual) and should confirm that accrued but unused PTO will be paid out in cash upon any termination of employment. If AHT maintains a "use-it-or-lose-it" policy or a cap on PTO accrual, such provisions must be clearly disclosed and consistently applied; a unilateral forfeiture of accrued PTO at termination would constitute a violation of the Wage Act.

Drafting Recommendations:

1. Include an express provision confirming the Company's obligation to pay all accrued wages, including accrued base salary, earned bonus, and accrued PTO, on the date of termination for any involuntary termination (including termination without Cause and termination for Cause), and on the next regular payday for any voluntary resignation.

2. Specify that accrued but unused PTO is paid out in cash at the employee's then-current base salary rate upon any termination of employment, regardless of the reason for termination.

3. Distinguish clearly between the final wage payment obligation (which is immediate and unconditional) and the commencement of severance payments (which is conditioned on execution of the Release Agreement and subject to the timing requirements of Section 409A).

4. Address final paycheck logistics, including confirmation that payment may be made by direct deposit to the account on file (if the employee has authorized direct deposit) or by check mailed to the employee's last known address if direct deposit is not feasible.

F. Equity Compensation (Stock Options and RSUs)

The proposed equity awards — stock options representing 1.25% of AHT's fully diluted equity (subject to four-year vesting with a one-year cliff) and RSUs representing 0.50% of AHT's fully diluted equity (subject to three-year annual vesting) — generally are not classified as "wages" under the Massachusetts Wage Act.

Stock options and RSUs are equity-based compensation instruments that represent contingent interests in the employer's equity rather than fixed cash payments for services rendered. Unvested options and RSUs, in particular, are inherently contingent — the employee's entitlement is conditioned on continued service through the applicable vesting date, and the ultimate value is dependent on the future market price of the underlying equity. These characteristics distinguish equity awards from the "definitely determined" compensation that constitutes wages under the Act.

However, if equity awards were structured in such a manner as to create a definite entitlement to a cash payment upon vesting or exercise — for example, if the awards included a cash-settlement feature, a guaranteed minimum value, or an automatic cashless exercise mechanism that converted the equity interest into a fixed cash amount — they could theoretically be recharacterized as wages. This risk is unlikely given the standard option and RSU structures proposed for Dr. Elliston's awards, which will be granted pursuant to the AHT 2020 Equity Incentive Plan (as amended May 2021) and governed by separate Stock Option Award Agreement and RSU Award Agreement documents.

The equity acceleration provisions — 25% acceleration of unvested awards upon a non-CIC qualifying termination, and 100% acceleration upon a CIC qualifying termination — do not create additional Wage Act concerns. These provisions modify the vesting schedule but do not convert the equity awards into cash wages. The accelerated vesting is governed by the terms of the Equity Incentive Plan and the individual award agreements, and the resulting equity interests remain subject to the same market-based value fluctuations as any other equity holding.

No specific Wage Act drafting concerns have been identified with respect to the equity compensation component of Dr. Elliston's package.

G. Other Benefits and Perquisites

The remaining elements of the proposed compensation package — consisting of various benefits and perquisites — do not raise material Wage Act concerns. We address each briefly for completeness:

COBRA Continuation (Employer-Paid Premiums). The proposed Agreement provides for employer-paid COBRA premiums for twelve (12) months following a non-CIC qualifying termination and eighteen (18) months following a CIC qualifying termination. Employer-paid health insurance premiums are not classified as "wages" under the Wage Act; they represent continuation of health insurance benefits and are governed by COBRA and applicable state insurance law rather than the Wage Act's wage-payment provisions.

Life Insurance ($1,150,000 Coverage, Equal to 2× Base Salary). The employer-provided group life insurance benefit is not wages. It is a standard employee benefit governed by the applicable insurance policy and ERISA, rather than by the Wage Act.

401(k) Match (Up to 4%). Employer contributions to the Company's 401(k) plan are not wages under the Wage Act. These contributions are governed by ERISA, the Internal Revenue Code, and the terms of the plan document.

Relocation Allowance (Up to $75,000). The proposed Agreement includes a relocation allowance of up to $75,000. This provision is not expected to be utilized, as Dr. Elliston currently resides in Massachusetts at 87 Laurel Hill Road, Wellesley, Massachusetts 02481, and will not be relocating in connection with the engagement. If the allowance were utilized, it would be characterized as a reimbursement of relocation expenses rather than wages, and would not implicate the Wage Act.

Professional Development Allowance ($15,000/Year). The annual professional development allowance is a reimbursement for business-related expenses (e.g., conference attendance, continuing education, professional memberships) and is likely not wages under the Wage Act. To preserve this characterization, the allowance should be structured as a reimbursement — requiring submission of receipts or other documentation of qualifying expenses — rather than as a fixed supplemental payment. If structured as a flat annual payment without any documentation or substantiation requirement, there is a risk that it could be recharacterized as additional compensation constituting wages. We recommend that the Agreement require Executive to submit expense documentation and that AHT reimburse qualifying expenses up to the annual cap.

Executive Physical Exam Program. The employer-sponsored executive health screening benefit is not wages; it is an in-kind employer-provided benefit.

IV. Specific Drafting Recommendations

Based on the analysis set forth above, we provide the following consolidated drafting recommendations for the Executive Employment Agreement. These recommendations supplement the analysis-specific recommendations set forth in Section III and are intended to be implemented in the drafting of the Agreement.

A. Annual Bonus Provisions

1. Define the performance period (e.g., the Company's fiscal year, currently January 1 through December 31) and the applicable performance metrics (to be established annually by the Board or Compensation Committee) with sufficient specificity that it is clear when the bonus transitions from contingent compensation to earned wages.

2. State expressly that the annual bonus is not "earned" until (a) the end of the applicable performance period and (b) the determination by the Board or Compensation Committee that the applicable performance metrics have been satisfied. Until both conditions are met, the bonus remains contingent and does not constitute wages under the Act.

3. Avoid any provision that forfeits an already-earned bonus solely based on termination of employment before a specified payment date. If Executive's employment terminates after the close of a performance period but before the bonus is paid, and the applicable metrics have been satisfied, the bonus is wages and must be paid.

4. For the pro-rata bonus upon a qualifying termination, specify the calculation methodology with precision (e.g., target bonus multiplied by a fraction, the numerator of which is the number of days employed during the fiscal year through the date of termination and the denominator of which is 365 or 366, as applicable, with the actual bonus amount further adjusted for actual performance to the extent determinable) and specify the payment timeline (e.g., payable at the same time annual bonuses are paid to other similarly situated executives of the Company, but no later than March 15 of the calendar year following the year in which the termination occurs).

5. Preserve the Board's and Compensation Committee's discretion over annual bonus determinations to the extent consistent with Wage Act compliance. The Agreement may state that the Board retains discretion to adjust bonus amounts within the range of zero to 150% of the target bonus, based on its assessment of company and individual performance, provided that once a specific bonus amount has been determined and communicated to Executive, the determined amount constitutes wages and shall be paid without further conditions.

B. Signing Bonus Clawback Provisions

1. Structure the clawback as an affirmative repayment obligation on the part of Executive, not as a deduction from, setoff against, or withholding of final wages or other compensation owed by the Company.

2. Expressly prohibit AHT from offsetting or deducting the clawback amount against Executive's final base salary, earned bonus, accrued PTO payout, severance payments, or any other wages, compensation, or benefits owed to Executive at or following termination.

3. Implement a declining-balance approach to reduce the clawback amount ratably over the 24-month period, as follows:

(a) If the triggering event occurs during the first twelve (12) months following the Start Date, Executive shall repay 100% of the signing bonus ($250,000).

(b) If the triggering event occurs during months thirteen (13) through twenty-four (24) following the Start Date, Executive shall repay 50% of the signing bonus ($125,000).

4. Limit the triggering events for the clawback to (a) voluntary resignation by Executive without Good Reason (as defined in the Agreement), and (b) termination of Executive's employment by the Company for Cause (as defined in the Agreement). The clawback shall not be triggered by termination without Cause, resignation for Good Reason, death, or Disability, in any of which events Executive shall retain the full signing bonus without any repayment obligation.

5. Specify a reasonable repayment timeline (e.g., Executive shall repay the applicable clawback amount within sixty (60) days following the date of termination) and confirm that the repayment obligation shall survive the termination of the Agreement and shall be enforceable as an independent contractual obligation.

C. Severance and Release Provisions

1. Clearly bifurcate accrued wages (the "Accrued Obligations," payable regardless of the circumstances of termination and without condition on release execution) from severance payments and benefits (the "Severance Benefits," conditioned on timely execution and non-revocation of the Release Agreement).

2. Specify in unambiguous terms that execution and non-revocation of the General Release of Claims (Schedule B — Form of Release Agreement) is a condition precedent only for the Severance Benefits, and that the Accrued Obligations — including accrued but unpaid base salary, earned but unpaid annual bonus, accrued but unused PTO, and unreimbursed business expenses — shall be paid to Executive on the timeline required by applicable law regardless of whether Executive executes the Release Agreement.

3. The Release Agreement at Schedule B should provide for a twenty-one (21) day consideration period and a seven (7) day revocation period, consistent with the requirements of the Age Discrimination in Employment Act ("ADEA") and the Older Workers Benefit Protection Act ("OWBPA"), given that Dr. Elliston's age at the anticipated start date is relevant to ADEA compliance. If the termination occurs in connection with a group reduction in force or other program affecting multiple employees, the Release Agreement should be modified to provide the forty-five (45) day consideration period required by OWBPA in such circumstances.

4. Confirm that the severance payment timeline complies with both the Wage Act and Section 409A of the Internal Revenue Code. Severance payments should commence on the first regular payroll date following the effective date of the Release Agreement (i.e., the date on which the seven-day revocation period expires without revocation), subject to any adjustments required for Section 409A compliance, including the potential "catch-up" payment of amounts that would have been paid during the consideration and revocation period had the Release been immediately effective.

D. Final Pay Provisions

1. Include an express covenant by the Company to pay all Accrued Obligations on the date of discharge (for any involuntary termination, including termination without Cause and termination for Cause) or the next regular payday (for voluntary resignation), in compliance with M.G.L. c. 149, § 148.

2. Confirm that accrued but unused PTO shall be paid out in cash, at Executive's then-current base salary rate, upon any termination of employment, regardless of the reason for termination.

3. Address final paycheck logistics, including a provision stating that the final payment shall be delivered by direct deposit to the bank account on file (if Executive has authorized direct deposit and the account remains active) or by check mailed to Executive's last known home address, or such other address as Executive may designate in writing, if direct deposit is not feasible or has been revoked.

E. General Protective Language

1. Include a savings clause providing that, if any provision of the Agreement is found by a court of competent jurisdiction to violate the Wage Act or any other applicable law, such provision shall be automatically reformed to the minimum extent necessary to achieve compliance with the Act, without affecting the validity or enforceability of the remaining provisions.

2. Include an express acknowledgment that nothing in the Agreement is intended to, or shall be construed to, limit, waive, or diminish Executive's rights under the Massachusetts Wage Act, M.G.L. c. 149, §§ 148–150, or any other applicable federal, state, or local law governing the payment of wages.

3. Avoid any broad "setoff," "recoupment," or "netting" provision that could be construed as authorizing the Company to deduct, withhold, or offset amounts from Executive's wages. If any setoff or recoupment right is included (e.g., for the signing bonus clawback), it must be narrowly drafted and must expressly exclude any setoff against wages, as defined by the Wage Act.

V. Interaction with Other Legal Analyses

The Wage Act analysis set forth in this memorandum intersects with several other legal issues that are being addressed by other members of the Calderwood & Harkness team. We identify the principal interactions below to ensure coordination across the relevant workstreams.

Massachusetts Noncompetition Agreement Act (M.G.L. c. 149, § 24L). The proposed Employment Agreement includes a twelve (12) month post-termination non-competition covenant. Under the Massachusetts Noncompetition Agreement Act, which took effect on October 1, 2018, non-competition agreements must be supported by consideration, and the employer must provide "garden leave" or other mutually agreed-upon consideration during the restricted period. The proposed Agreement provides garden-leave payments of $287,500 (equal to 50% of base salary) during the twelve-month non-compete period. This garden-leave payment is separate consideration for the non-compete obligation and should not be classified as deferred wages under the Wage Act. The garden-leave payment is conditioned on Executive's compliance with the non-compete and is consideration for the restriction on Executive's post-employment activities, not compensation for services previously rendered. The Noncompetition Agreement Act issues, including the enforceability of the non-compete covenant and the adequacy of the garden-leave consideration, are analyzed separately in Nadia Petrov's memorandum dated July 25, 2022.

Section 409A Compliance. The timing of severance payments must be carefully coordinated with the requirements of Section 409A of the Internal Revenue Code to avoid both Wage Act penalties and the 20% excise tax imposed by Section 409A on non-compliant deferred compensation arrangements. Where the Wage Act requires immediate payment of earned wages at termination but Section 409A may require deferred payment of certain separation benefits, the Agreement must be structured to satisfy both regimes simultaneously. Gregory Tan is addressing the Section 409A analysis in a forthcoming memorandum (subsequently dated August 22, 2022), and we will coordinate with him to ensure that the severance payment timeline in the Agreement is compliant with both the Wage Act and Section 409A.

Section 280G / "Golden Parachute" Analysis. The proposed CIC severance provisions could result in "excess parachute payments" within the meaning of Section 280G of the Internal Revenue Code, triggering a 20% excise tax on Executive under Section 4999 and a loss of the employer's deduction under Section 280G. The Agreement includes a "best net" cutback provision, which reduces CIC severance if the after-tax benefit to Executive would be greater post-reduction than with full payment and imposition of the excise tax. This cutback mechanism must be implemented in a way that does not result in the withholding or reduction of amounts classified as earned wages under the Wage Act. The 280G analysis is being coordinated by Gregory Tan and Nadia Petrov, with supporting calculations to be set forth in the CIC Severance Calculation Spreadsheet (subsequently dated September 2, 2022). We will coordinate with them to ensure that the cutback operates only on true severance and non-wage components of the CIC package.

Massachusetts Non-Solicitation and Non-Disclosure Enforceability. In addition to the non-competition covenant, the proposed Agreement includes non-solicitation and non-disclosure covenants. The garden-leave payment and any post-termination compensation obligations may implicate Wage Act timing rules to the extent they are classified as wages rather than consideration for restrictive covenants. The enforceability of the non-solicitation and non-disclosure provisions, and their interaction with the Wage Act, is addressed separately in Nadia Petrov's memorandum dated August 8, 2022.

VI. Conclusion and Next Steps

The Massachusetts Wage Act imposes strict and unforgiving requirements on the payment of wages, with mandatory treble damages for any violation and no judicial discretion to mitigate penalties based on good faith, inadvertence, or other equitable considerations. Given the substantial dollar amounts involved in Dr. Elliston's proposed compensation package — including first-year total cash compensation at target of approximately $1,256,250, CIC severance of up to approximately $2,051,200 (excluding equity), and a $250,000 signing bonus — the financial exposure for non-compliance is significant. At treble damages, the aggregate potential exposure could exceed several million dollars, exclusive of attorneys' fees, costs, and the risk of individual liability for AHT's officers.

The highest-risk elements of the proposed package are:

1. The $250,000 signing bonus clawback, which must be structured as an independent repayment obligation rather than as a deduction from or offset against wages. A clawback provision that operates as a wage deduction would almost certainly violate the Wage Act and expose AHT to mandatory treble damages of $750,000, plus attorneys' fees and costs.

2. The annual bonus provisions, which must be drafted to avoid the forfeiture of already-earned bonuses based solely on employment status at the time of payment. Once the performance period has concluded and the applicable metrics have been satisfied, the bonus is wages, and any forfeiture or clawback of the earned amount would constitute a Wage Act violation.

3. The final pay timing requirements upon termination, which require same-day payment of all accrued wages upon involuntary termination (including termination for Cause) and next-regular-payday payment upon voluntary resignation. AHT must ensure its payroll systems can process final pay on the required timeline, as even a single day's delay triggers mandatory treble damages.

The drafting recommendations set forth in this memorandum have been incorporated into the first draft of the Executive Employment Agreement, which was circulated to the deal team on August 5, 2022. The Agreement will be further refined as negotiations with Fielding & Rowe LLP (Catherine A. Fielding, counsel for Dr. Elliston) progress, and we will continue to monitor developments in Wage Act jurisprudence that may affect the analysis.

Devon Archer and Nadia Petrov are available to discuss these recommendations with AHT's General Counsel Aaron Whitfield and Chief Human Resources Officer Lisa Murakami at their convenience, and to coordinate with Hargrove & Sinclair CPAs (Malcolm R. Sinclair) on any tax-related timing considerations that intersect with Wage Act compliance. We recommend scheduling a call during the week of August 8 to review the first draft of the Agreement and to address any questions from the AHT team before circulation to Dr. Elliston's counsel.

This memorandum is a privileged and confidential attorney work product prepared by Calderwood & Harkness LLP for the exclusive use of the addressees in connection with the engagement described herein. It is protected by the attorney-client privilege, the work product doctrine, and all other applicable privileges and protections. This memorandum does not constitute legal advice to any person or entity other than the addressees and should not be relied upon by any third party. Distribution, copying, or disclosure of this memorandum or its contents without the express written consent of Cal

MEMORANDUM
PRIVILEGED AND CONFIDENTIAL — ATTORNEY WORK PRODUCT
TO: Bernard Crawford, Responsible Partner, Labor & Employment, Calderwood & Harkness LLP; Aaron Whitfield, General Counsel, Arbor Health Technologies Inc.
FROM: Devon Archer, Lead Associate, Labor & Employment, Calderwood & Harkness LLP
DATE: August 1, 2022
RE: Massachusetts Wage Act Considerations for Executive Compensation — Dr. Marcus J. Elliston, Prospective COO, Arbor Health Technologies Inc.
Matter No.: 1010-00004
Client No.: 81-30294
I. Purpose and Summary
This memorandum analyzes the implications of the Massachusetts Wage Act, M.G.L. c. 149, §§ 148–150 (the "Wage Act" or the "Act"), for the proposed compensation package currently being negotiated with Dr. Marcus J. Elliston ("Dr. Elliston" or "Executive") in connection with his prospective engagement as Chief Operating Officer of Arbor Health Technologies Inc. ("AHT" or the "Company"), a Delaware corporation headquartered at 400 Brattle Commerce Park, Suite 1200, Cambridge, Massachusetts 02138. The parties contemplate that the Employment Agreement will be governed by the laws of the Commonwealth of Massachusetts, and that Dr. Elliston will perform his duties primarily from AHT's Cambridge headquarters.
The proposed compensation package for Dr. Elliston, as reflected in the most recent term sheet circulated on July 18, 2022, includes the following principal elements:
• Base Salary: $575,000 per annum;
• Annual Bonus: Target of 75% of base salary ($431,250 at target), with a maximum payout of 150% of target (i.e., $646,875), to be based on company and individual performance metrics established annually by AHT's Board of Directors (or its Compensation Committee);
• Signing Bonus: $250,000, payable within thirty (30) days of commencement of employment, subject to a 24-month clawback provision;
• Equity Grants: Stock options representing 1.25% of the Company's fully diluted equity (four-year vesting, one-year cliff) and restricted stock units ("RSUs") representing 0.50% of the Company's fully diluted equity (three-year vesting, annual);
• Severance Protections: Twelve (12) months of base salary continuation upon a qualifying termination (i.e., termination without Cause or resignation for Good Reason) occurring outside the context of a change in control, and twenty-four (24) months of base salary continuation plus two times the target annual bonus upon a qualifying termination occurring within twenty-four (24) months following a change in control;
• Additional Benefits: Including employer-paid COBRA continuation, life insurance, 401(k) matching, PTO, and certain perquisites.
This memorandum has been prepared to identify areas where the proposed compensation structure may create compliance risk under the Wage Act, and to provide specific drafting recommendations for the Executive Employment Agreement (the "Agreement"). Our overarching conclusion is that several components of the proposed package — most critically the signing bonus clawback, the annual bonus provisions, and the final pay timing obligations — require careful structuring to comply with the Wage Act's exacting requirements. Massachusetts courts have broadly construed the statutory definition of "wages," and the penalties for noncompliance are severe: treble damages are mandatory, and the courts possess no discretion to reduce them. The financial exposure to AHT, given the substantial dollar amounts at issue, warrants a conservative approach to drafting.
The specific drafting recommendations set forth in this memorandum have been incorporated into the initial draft of the Agreement, which was circulated to the deal team on August 5, 2022, and will be further refined as negotiations with Dr. Elliston's counsel, Catherine A. Fielding of Fielding & Rowe LLP, progress.
II. Overview of the Massachusetts Wage Act
A. Statutory Framework
The Massachusetts Wage Act is one of the most employee-protective wage-payment statutes in the nation. Its core provisions are set forth in three principal sections:
M.G.L. c. 149, § 148 establishes the fundamental requirements governing the timely payment of wages in the Commonwealth. Section 148 mandates that employers pay wages to employees on regular, established paydays. For salaried employees, payments must be made at least semi-monthly, though many employers elect to pay on a biweekly basis consistent with their standard payroll cycle. Critically, Section 148 also imposes strict timing requirements upon the termination of employment: when an employee is involuntarily discharged, all wages due must be paid on the date of discharge; when an employee voluntarily resigns, all wages must be paid on the next regular payday or, if there is no regular payday, on the following Saturday. In addition, Section 148 prohibits employers from making unauthorized deductions from wages and bars the use of "special contracts" that purport to exempt the employer from the Act's requirements. The anti-deduction provisions are broadly worded and have been the subject of significant litigation, as discussed further in connection with the proposed signing bonus clawback in Section III.C below.
M.G.L. c. 149, § 148A addresses wage complaints and enforcement procedures through the Attorney General's Office. Section 148A authorizes the Attorney General to investigate complaints of wage theft and to bring enforcement actions against non-compliant employers, including civil citations and, in egregious cases, criminal penalties. While the Attorney General's enforcement authority is relevant background for understanding the Wage Act's regulatory context, this memorandum focuses primarily on the private-right-of-action provisions of Section 150, which present the more immediate risk profile for AHT in the context of the Elliston engagement.
M.G.L. c. 149, § 150 provides a private right of action for employees aggrieved by a violation of Section 148 or other provisions of the Wage Act. The statute mandates treble damages — that is, three times the amount of actual damages — plus reasonable attorneys' fees and costs for any successful claim. The Supreme Judicial Court ("SJC") has emphatically held that the treble damages provision is mandatory and non-discretionary: the court has no authority to award less than three times actual damages, regardless of mitigating circumstances, the employer's good faith, or any other equitable considerations. See Wiedmann v. The Bradford Group, Inc., 444 Mass. 698, 707 (2005); Klauber v. Camberwell Data Systems, No. 2019-01724, 2021 Mass. Super. Calderon Systems 305 (Mass. Super. Ct. 2021). The mandatory nature of treble damages distinguishes the Massachusetts Wage Act from the wage-payment statutes of most other states and materially increases the financial exposure associated with noncompliance.
M.G.L. c. 149, § 148B addresses the classification of workers as independent contractors and establishes a three-prong test for determining whether a worker has been properly classified. Because Dr. Elliston will be engaged as a W-2 employee of AHT and will receive employment benefits consistent with his executive status, Section 148B is not directly implicated by the proposed engagement. We note it here for completeness and because the classification analysis reinforces the breadth of the Wage Act's protective framework.
B. Broad Definition of "Wages"
The Massachusetts Wage Act does not narrowly define "wages" as limited to base salary or hourly pay. Rather, Massachusetts courts have consistently interpreted the term to encompass all compensation that has been "definitely determined" and that has "become due and payable" to the employee. This expansive construction reflects the legislature's intent to protect employees from the non-payment or delayed payment of earned compensation in all its forms.
The SJC's decision in Wiedmann v. The Bradford Group, Inc., 444 Mass. 698 (2005), is the foundational precedent on this issue. In Wiedmann, the Court held that commissions that had been earned by a salesperson constituted "wages" subject to the Act's protections, and that the employer's failure to timely pay those commissions gave rise to mandatory treble damages under Section 150. The Court emphasized that the critical inquiry is whether the compensation has been "definitely determined" — that is, whether the conditions precedent to the employee's entitlement have been satisfied — rather than whether the compensation takes the form of base salary, commissions, bonuses, or some other category of pay.
Subsequent decisions have extended this principle to encompass contractually promised bonuses. In Stanton v. Lighthouse Financial Group, 2017 Mass. Super. Calderon Systems 142 (Mass. Super. Ct. 2017), the court held that an annual bonus became "wages" when the employee satisfied the specified performance criteria, notwithstanding the employer's assertion that the bonus was discretionary. Similarly, in Segal v. Genitope Corp., No. 2011-03841, 2014 Mass. Super. Calderon Systems 189 (Mass. Super. Ct. 2014), the court analyzed whether a retention bonus constituted wages and concluded that once the triggering conditions were met, the compensation was "definitely determined" and fell within the Act's protections.
The distinction between "earned" wages and discretionary or contingent compensation is therefore the critical analytical framework for evaluating the components of Dr. Elliston's proposed package. Once compensation is "definitely determined" and "earned" — meaning the conditions precedent to the employee's entitlement have been satisfied — it becomes a "wage" subject to the Wage Act's timing, anti-deduction, and remedial provisions. Compensation that remains discretionary, contingent, or unearned does not attain wage status until the conditions are satisfied or the employer exercises its discretion to award it.
This distinction is of paramount importance in evaluating multiple elements of Dr. Elliston's proposed compensation, including the signing bonus, the annual bonus, and the severance protections, each of which requires independent analysis as set forth in Section III below.
C. Remedies and Exposure
The remedial provisions of the Wage Act warrant particular attention in the context of the Elliston engagement, given the substantial dollar amounts at issue.
Mandatory Treble Damages. As noted, Section 150 mandates treble damages for any violation of the Act. The court has no discretion to award less than three times actual damages. This means that a failure to timely pay, for example, a $431,250 earned annual bonus could result in liability of $1,293,750 in damages alone — before attorneys' fees and costs. For the signing bonus ($250,000), a violation could result in exposure of $750,000. The aggregate potential exposure across all compensation elements is substantial.
Attorneys' Fees and Costs. In addition to treble damages, Section 150 requires the court to award reasonable attorneys' fees and costs to any prevailing plaintiff. In complex executive compensation disputes, attorneys' fees alone can amount to hundreds of thousands of dollars, further increasing AHT's total exposure.
Individual Liability. The Wage Act extends liability beyond the corporate employer to "the president and treasurer of a corporation and any officers or agents having the management of such corporation." M.G.L. c. 149, § 148. This means that individual officers of AHT — potentially including CEO Priya Chandrasekaran, General Counsel Aaron Whitfield, and CHRO Lisa Murakami — could be held personally liable for Wage Act violations if they are deemed to be officers or agents having management responsibility for the company's wage-payment obligations. Individual liability is a significant concern that underscores the importance of institutional compliance.
Statute of Limitations. The statute of limitations for Wage Act claims is three years from the date of the alleged violation. M.G.L. c. 260, § 5A. In the context of executive compensation, where disputes often arise upon termination and may involve claims reaching back to compensation decisions made years earlier, the three-year limitations period provides a substantial window for claims.
No Waiver. The Wage Act's protections cannot be waived by agreement between the employer and employee. Any contractual provision that purports to waive the employee's rights under the Act, or that functions as a "special contract" to exempt the employer from compliance, is void and unenforceable. This principle constrains the range of permissible drafting approaches and requires that the Agreement be structured to achieve the parties' commercial objectives within the Act's mandatory framework.
These severe remedies counsel strongly in favor of conservative structuring and robust compliance in the drafting of the Executive Employment Agreement.
III. Analysis of Specific Compensation Elements
A. Base Salary ($575,000 Per Annum)
Base salary is unambiguously "wages" within the meaning of the Wage Act. There is no case law or statutory ambiguity on this point. AHT must pay Dr. Elliston's base salary on regular, established paydays, at intervals no less frequent than semi-monthly for salaried employees, consistent with the Company's standard payroll cycle. AHT currently operates a biweekly payroll cycle for all employees, which satisfies the statutory requirements.
No special drafting concerns arise with respect to the base salary provisions, provided AHT's payroll practices remain compliant with Section 148's timing requirements throughout the term of employment. The base salary is straightforward earned compensation, accruing ratably over each pay period, and must be paid in full on each regularly scheduled payday without unauthorized deductions.
Upon any termination of employment, the final payment of accrued but unpaid base salary is governed by the timing rules discussed in Section III.E below.
B. Annual Bonus (Target: $431,250; Maximum: $646,875)
The annual bonus is the first area of material Wage Act complexity in Dr. Elliston's proposed compensation package.
Classification Risk. Whether an annual bonus constitutes "wages" under the Wage Act depends upon whether the bonus is "definitely determined" — that is, whether it has been earned through the satisfaction of specified conditions — or whether it remains discretionary. This classification has profound consequences: if the bonus is a wage, then it is subject to the Act's mandatory timing rules, anti-deduction provisions, and treble damages remedies; if it is not a wage (because it remains discretionary and unawardable), then the Act's protections do not attach.
"Definitely Determined" Bonuses. If the Employment Agreement establishes a formula-based or metric-based bonus entitlement — for example, providing that Executive shall receive a bonus equal to a specified percentage of base salary upon the achievement of specified company revenue targets, EBITDA margins, or individual performance goals — then once those conditions are satisfied, the bonus becomes "definitely determined" and constitutes wages under the Act. Massachusetts courts, including the SJC, have held that contractually promised bonuses tied to measurable, objective criteria are wages once the criteria are met. See Wiedmann, 444 Mass. at 707; Stanton, 2017 Mass. Super. Calderon Systems 142; see also Advisory from the Attorney General's Fair Labor Division, "An Advisory from the Attorney General's Fair Labor Division on Earned Sick Time" (analogizing to earned bonus principles).
This classification applies regardless of the nomenclature used in the agreement. Labeling a payment as a "bonus" does not exempt it from Wage Act coverage if the underlying structure creates a definite entitlement upon the satisfaction of specified conditions. Substance, not form, controls.
Discretionary Bonuses. A purely discretionary bonus — where the employer retains unfettered, absolute discretion over whether to pay any bonus at all, in what amount, and to whom — may fall outside the Wage Act's definition of wages, because the compensation has not been "definitely determined" until the employer exercises its discretion. However, the line between a genuinely discretionary bonus and a contractually committed bonus with a veneer of discretionary language can be exceedingly thin. Courts will look beyond the contractual labels to the actual structure of the bonus program. Moreover, once a discretionary bonus is declared or awarded — for example, when the Board of Directors or Compensation Committee approves a specific bonus amount for Executive — the bonus becomes "definitely determined" at that point and attains wage status.
Proposed Structure. The proposed Employment Agreement contemplates a target bonus of 75% of base salary ($431,250) with a maximum payout of 150% of target ($646,875). As currently drafted, the bonus will be tied to company and individual performance metrics established annually by the AHT Board of Directors or its Compensation Committee. This structure — specifying both a target percentage and performance criteria — creates a substantial risk that, once the applicable metrics are achieved, the bonus will be classified as "definitely determined" and therefore as wages under the Act. The express statement of a target bonus amount, in particular, creates an expectation of payment that may be difficult to characterize as purely discretionary.
Forfeiture-on-Resignation Provisions. A provision requiring forfeiture of an earned bonus upon voluntary resignation before a specified payout date (for example, requiring continued employment on the date the bonus is paid, typically in February or March of the year following the performance period) is likely unenforceable under the Wage Act if the bonus has already been "earned." If the applicable performance period has concluded and the relevant metrics have been satisfied, the bonus constitutes wages that have been "definitely determined," and AHT cannot lawfully condition payment on continued employment past the earning date. Such a provision would operate as a forfeiture of earned wages in violation of Section 148.
This issue is of particular concern in the context of Dr. Elliston's employment, because executive bonuses are frequently paid several months after the close of the performance year (to allow for auditing and finalization of financial results). During that gap period, any departure by Dr. Elliston would trigger the forfeiture provision and expose AHT to a Wage Act claim.
Pro-Rata Bonus on Termination. The proposed severance provisions contemplate payment of a pro-rata annual bonus for the year of termination, calculated based on actual performance through the date of termination, upon a qualifying termination (i.e., termination without Cause or resignation for Good Reason). This provision is consistent with Wage Act requirements insofar as it ensures that earned bonus compensation is paid and is not forfeited solely due to the timing of termination. We recommend retaining this provision and ensuring that the pro-rata calculation methodology is clearly specified to minimize disputes.
Drafting Recommendations. Based on the foregoing analysis, we recommend the following with respect to the annual bonus provisions of the Agreement:
1. Clearly delineate the performance period (e.g., the fiscal year) and the specific conditions precedent to bonus earning, so that it is apparent when the bonus transitions from contingent to earned.
2. Avoid any provision that forfeits an already-earned bonus based solely on employment status at the time of payment. If AHT desires a continued-employment requirement, it should apply only to bonuses for which the performance period has not yet concluded — not to bonuses already earned through the completion of a full performance year.
3. If AHT wishes to retain meaningful discretion over the bonus, use language expressly reserving full and absolute discretion over the bonus amount and the decision whether to pay any bonus at all. However, once the Board or Compensation Committee has approved a specific bonus amount, treat the approved amount as wages and pay it on the regular payroll cycle without further conditions.
4. Include language clarifying that any bonus for which the applicable performance period has not been completed, and for which the applicable performance metrics have not been determined to be satisfied, remains contingent and is not a "wage" until earned.
5. For the pro-rata bonus upon qualifying termination, specify the calculation methodology (e.g., target bonus multiplied by a fraction, the numerator of which is the number of days employed during the fiscal year and the denominator of which is 365) and the payment timeline (e.g., payable at the same time bonuses are paid to other senior executives, but no later than March 15 of the year following the year of termination, to comply with the short-term deferral exemption under Section 409A).
C. Signing Bonus ($250,000) and 24-Month Clawback
The $250,000 signing bonus and its associated clawback provision present the single highest-risk Wage Act issue in the proposed compensation package.
Classification. A signing bonus payable upon commencement of employment is almost certainly "wages" once paid. The bonus is a fixed amount ($250,000), payable within thirty (30) days of Dr. Elliston's start date (anticipated to be November 1, 2022), with no performance conditions or contingencies other than commencement of employment. Once the condition precedent (beginning employment) is satisfied and the payment is made, the signing bonus constitutes compensation that has been "definitely determined" and paid to the employee. At that point, it is a wage under the Act.
Clawback Risk — Critical Issue. The proposed Employment Agreement includes a 24-month clawback provision requiring Dr. Elliston to repay the full $250,000 signing bonus in the event of (a) voluntary resignation without Good Reason or (b) termination for Cause, in either case occurring within twenty-four (24) months of the start date. This clawback provision creates significant Wage Act risk.
Wage Act Tension. Section 148 of the Wage Act prohibits employers from making "a special contract with an employee or prospective employee" that purports to authorize deductions from wages, and further prohibits any "deduction" from wages except as authorized by law or with the express written consent of the employee for specifically enumerated purposes (e.g., insurance premiums, union dues). A clawback provision that operates as a deduction from wages owed at termination — for example, if AHT were to deduct $250,000 from Dr. Elliston's final paycheck or severance — would almost certainly violate Section 148. The prohibition is categorical, and no contractual language can override it.
Distinction Between "Deduction" and "Repayment Obligation." The critical question is whether a contractual repayment obligation — whereby the Executive is required to affirmatively repay the Company from the Executive's own funds, rather than the Company unilaterally deducting the amount from the Executive's final paycheck or other wages — constitutes a permissible contractual remedy or an impermissible circumvention of the anti-deduction provisions.
Massachusetts courts have not definitively resolved this question. There is no SJC decision directly addressing whether a signing bonus clawback structured as an independent repayment obligation violates the Wage Act. However, several lower court decisions and the overall trajectory of Wage Act jurisprudence provide useful guidance:
• Courts have generally upheld the distinction between a unilateral deduction by the employer (which is prohibited) and an independent contractual obligation of the employee to repay (which may be permissible, subject to the specific facts).
• The key factor appears to be whether the employer actually withholds the clawback amount from wages or other compensation owed to the employee at termination. If the employer pays all wages in full and then separately pursues the repayment obligation through ordinary contractual remedies (e.g., demand for payment, arbitration, or litigation), the risk of a Wage Act violation is significantly reduced.
• However, even a well-structured repayment obligation is not entirely free from risk. An aggressive plaintiff's counsel could argue that the clawback provision is functionally a "special contract" designed to circumvent the Wage Act, particularly if the practical effect is to reduce the employee's net compensation below what was "definitely determined" and paid.
The safer approach, and the one we recommend, is to structure the clawback as an independent contractual repayment obligation, entirely separate from any setoff against or deduction from final wages, and to include express contractual language confirming that AHT will not withhold or deduct the clawback amount from any wages owed to Executive at termination.
Drafting Recommendations. We recommend the following approach for the signing bonus clawback provisions:
1. Structure the clawback as a freestanding, affirmative repayment obligation. The relevant provision should state that, in the event of a triggering event (voluntary resignation without Good Reason or termination for Cause within 24 months), Executive shall repay to the Company the applicable clawback amount within a specified period (e.g., sixty (60) days following the date of termination), from Executive's own funds.
2. Expressly state that AHT shall not deduct, withhold, or offset the clawback amount from any final paycheck, accrued wages, earned bonus, accrued PTO, severance, or any other compensation or benefit owed to Executive at or following termination.
3. Consider a declining-balance clawback to improve the reasonableness and enforceability of the provision. Rather than requiring full repayment of the entire $250,000 regardless of when during the 24-month period the termination occurs, the Agreement could provide for a pro-rata reduction over time. For example:
• If voluntary resignation without Good Reason or termination for Cause occurs within the first twelve (12) months following the start date, Executive shall repay 100% of the signing bonus ($250,000).
• If such termination occurs during months thirteen (13) through twenty-four (24) following the start date, Executive shall repay 50% of the signing bonus ($125,000).
This declining-balance approach reflects the fact that AHT derives increasing benefit from Dr. Elliston's services as his tenure lengthens, and it reduces the likelihood that a court would view the clawback as an unreasonable penalty or an end-run around the Wage Act.
4. Include an acknowledgment by Executive that the repayment obligation is a bona fide contractual obligation arising from the parties' arms-length negotiations, that it is not a wage deduction or special contract within the meaning of the Wage Act, and that Executive has received independent legal advice (from Catherine A. Fielding, Esq.) regarding this provision.
5. Confirm that the clawback does not apply upon termination without Cause or resignation for Good Reason. The clawback should be triggered only by voluntary resignation without Good Reason or termination for Cause, consistent with the principle that Executive should not bear the financial burden of the clawback when the separation is attributable to the Company's action or to circumstances constituting Good Reason.
D. Severance Payments
The proposed severance protections are structured in two tiers depending on whether the qualifying termination occurs within the context of a change in control:
Without Change in Control (Non-CIC Qualifying Termination):
• Twelve (12) months of base salary continuation: $575,000;
• Pro-rata annual bonus for the year of termination, based on actual performance;
• Twelve (12) months of employer-paid COBRA continuation: approximately $2,150 per month, totaling $25,800;
• Acceleration of 25% of then-unvested equity awards.
Following a Change in Control (CIC Qualifying Termination — within 24 months following CIC):
• Twenty-four (24) months of base salary continuation: $1,150,000;
• Two times the target annual bonus: $862,500;
• Eighteen (18) months of employer-paid COBRA continuation: approximately $2,150 per month, totaling $38,700;
• Full (100%) acceleration of all unvested equity awards.
• Total estimated CIC cash severance (excluding equity and pro-rata bonus): $2,051,200.
Classification Under the Wage Act. The classification of severance payments under the Massachusetts Wage Act is nuanced and context-dependent. Severance payments are generally not considered "wages" under the Act if they represent gratuitous or discretionary payments made in exchange for a general release of claims or in recognition of past service, rather than compensation for services rendered. This distinction rests on the principle that severance is prospective, post-employment compensation rather than backward-looking pay for work already performed.
However, when an employment agreement creates a contractual entitlement to severance upon the occurrence of specified triggering events — as is the case here, where the Agreement provides that Executive "shall be entitled to" specified severance benefits upon a qualifying termination — some courts have suggested that the contractual severance obligation may take on characteristics of a wage claim, particularly where the severance is calculated by reference to the employee's base salary or bonus. The case law is not entirely settled, and the prudent approach is to treat contractual severance provisions with the same care as wage-related provisions, even if the payments ultimately would be classified as non-wage contractual obligations.
Conditioned on Execution of Release. The proposed Agreement conditions all severance payments and benefits on Executive's timely execution and non-revocation of a General Release of Claims, the form of which is attached as Schedule B to the Agreement (the "Release Agreement"). This is standard practice in executive employment agreements, and it is generally permissible even under the Wage Act, for the following reason: severance is consideration for the release. The Executive is not forfeiting "earned" wages by signing the release; rather, the Executive is receiving additional, previously unearned compensation in exchange for relinquishing legal claims against the Company. This quid pro quo structure distinguishes severance from earned wages.
The critical corollary, however, is that the Agreement must clearly distinguish between severance payments (which are properly conditioned on the release) and any accrued but unpaid wages (including final base salary, earned bonus, and accrued PTO), which must be paid at the time required by the Wage Act regardless of whether Executive executes the release. A provision that conditions the payment of accrued, earned wages on the execution of a release would violate the Wage Act and would expose AHT to mandatory treble damages.
Timing of Payment. Severance should be payable on a schedule consistent with Section 409A of the Internal Revenue Code, as analyzed separately by Gregory Tan in his forthcoming memorandum on Section 409A compliance (subsequently dated August 22, 2022). The Section 409A analysis will address, among other things, the applicability of the "separation pay" exception, the "short-term deferral" rule, and the six-month delay requirement for "specified employees" of publicly traded companies (which is not currently applicable to AHT but may become relevant if AHT pursues an initial public offering). While Section 409A compliance is essential to avoid the 20% excise tax and other adverse tax consequences, AHT should be cautious not to impose delays on the payment of amounts that could be classified as wages under the Wage Act. If there is a conflict between the Wage Act's immediate-payment requirements and Section 409A's timing rules, the Agreement should be structured to satisfy both regimes — typically by bifurcating the severance into a Wage Act-compliant payment of accrued wages and a separately timed severance payment.
Drafting Recommendations. We recommend the following approach for the severance and release provisions:
1. Clearly separate contractual severance payments from any accrued and unpaid wages. The Agreement should include a defined term (e.g., "Accrued Obligations") encompassing all earned, unpaid base salary through the termination date, any earned but unpaid annual bonus for a completed performance period, accrued but unused PTO, and unreimbursed business expenses, and should provide that the Accrued Obligations are payable upon termination regardless of the circumstances of termination and without regard to whether Executive executes the Release Agreement.
2. Specify that accrued wages will be paid on the termination date (for involuntary termination, including termination without Cause) or the next regular payday (for voluntary resignation), in compliance with the Wage Act's timing requirements, and without condition on the execution of the Release Agreement.
3. Specify the severance payment commencement date — for example, the first regular payroll date following the effective date of the Release Agreement (i.e., the expiration of the seven-day revocation period without revocation), subject to Section 409A compliance.
4. Confirm that the Section 280G "best net" cutback provision — which reduces CIC severance if the after-tax benefit to Executive would be greater post-reduction than with full payment of the "excess parachute payment" and imposition of the Section 4999 excise tax — does not result in the withholding or reduction of amounts classified as earned wages under the Wage Act. The 280G analysis is being conducted separately by Gregory Tan and Nadia Petrov, with supporting calculations to be set forth in the CIC Severance Calculation Spreadsheet (subsequently dated September 2, 2022). We will coordinate with them to ensure that the cutback mechanism operates only on true severance and does not impermissibly reduce earned wages.
E. Timing of Final Payment Upon Termination
The Wage Act imposes strict and differentiated timing requirements for the payment of final wages upon termination of employment, depending on the nature of the termination:
Involuntary Termination (Discharge / Termination Without Cause). Section 148 requires that, when an employee is involuntarily discharged, "the employer shall pay the employee the wages earned by him" on the date of discharge. This is an absolute, same-day payment requirement. It applies to all accrued base salary, earned bonuses, accrued but unused PTO, and any other compensation classified as wages. There is no grace period, no provision for payment on the next regular payday, and no exception for administrative convenience. The SJC has confirmed that even a one-day delay in the payment of final wages to a discharged employee constitutes a violation of the Act and triggers mandatory treble damages. See Camara v. Attorney General, 458 Mass. 756, 762-63 (2011).
Voluntary Resignation. When an employee voluntarily resigns, Section 148 requires payment of all wages due on the "next regular payday" following the resignation, or, if there is no regular payday, on the following Saturday. This provides slightly more flexibility than the same-day rule applicable to involuntary terminations, but the employer must still ensure prompt payment.
Termination for Cause. A termination for Cause is treated as an involuntary termination (discharge) for purposes of the Wage Act. Even though the employee's own conduct may have precipitated the termination, the legal characterization is that the employer is unilaterally ending the employment relationship, which triggers the same-day payment requirement. AHT must pay all accrued wages on the date of a Cause termination, notwithstanding that the employee may have engaged in misconduct.
Practical Considerations. AHT must ensure that its payroll systems and human resources processes can accommodate the Wage Act's final pay timing requirements. For involuntary terminations (including termination without Cause and termination for Cause), AHT's payroll department must be able to process and deliver a final paycheck — including accrued base salary, earned bonus, accrued PTO payout, and any other wage amounts — on the actual date of termination, which may not coincide with a regular payroll processing cycle. This requires advance planning, coordination between AHT's human resources, legal, and finance teams, and, in many cases, the preparation of a manual check or off-cycle direct deposit. Failure to timely pay final wages — even by a single day and even due to an inadvertent administrative error — triggers the mandatory treble damages provision. There is no good-faith defense and no de minimis exception.
Accrued But Unused PTO. The proposed Employment Agreement provides Dr. Elliston with twenty-five (25) days of paid time off ("PTO") per year. Under Massachusetts law, accrued but unused vacation time — and, by extension, accrued but unused PTO under a combined policy — constitutes "wages" within the meaning of the Wage Act and must be paid out upon any termination of employment, regardless of the reason for termination. See Massachusetts Attorney General's Advisory 2008/1; Stanton, 2017 Mass. Super. Calderon Systems 142.
The Agreement should specify the mechanics of PTO accrual (e.g., pro-rata accrual over the course of the year, with full annual accrual at the beginning of the year, or milestone-based accrual) and should confirm that accrued but unused PTO will be paid out in cash upon any termination of employment. If AHT maintains a "use-it-or-lose-it" policy or a cap on PTO accrual, such provisions must be clearly disclosed and consistently applied; a unilateral forfeiture of accrued PTO at termination would constitute a violation of the Wage Act.
Drafting Recommendations:
1. Include an express provision confirming the Company's obligation to pay all accrued wages, including accrued base salary, earned bonus, and accrued PTO, on the date of termination for any involuntary termination (including termination without Cause and termination for Cause), and on the next regular payday for any voluntary resignation.
2. Specify that accrued but unused PTO is paid out in cash at the employee's then-current base salary rate upon any termination of employment, regardless of the reason for termination.
3. Distinguish clearly between the final wage payment obligation (which is immediate and unconditional) and the commencement of severance payments (which is conditioned on execution of the Release Agreement and subject to the timing requirements of Section 409A).
4. Address final paycheck logistics, including confirmation that payment may be made by direct deposit to the account on file (if the employee has authorized direct deposit) or by check mailed to the employee's last known address if direct deposit is not feasible.
F. Equity Compensation (Stock Options and RSUs)
The proposed equity awards — stock options representing 1.25% of AHT's fully diluted equity (subject to four-year vesting with a one-year cliff) and RSUs representing 0.50% of AHT's fully diluted equity (subject to three-year annual vesting) — generally are not classified as "wages" under the Massachusetts Wage Act.
Stock options and RSUs are equity-based compensation instruments that represent contingent interests in the employer's equity rather than fixed cash payments for services rendered. Unvested options and RSUs, in particular, are inherently contingent — the employee's entitlement is conditioned on continued service through the applicable vesting date, and the ultimate value is dependent on the future market price of the underlying equity. These characteristics distinguish equity awards from the "definitely determined" compensation that constitutes wages under the Act.
However, if equity awards were structured in such a manner as to create a definite entitlement to a cash payment upon vesting or exercise — for example, if the awards included a cash-settlement feature, a guaranteed minimum value, or an automatic cashless exercise mechanism that converted the equity interest into a fixed cash amount — they could theoretically be recharacterized as wages. This risk is unlikely given the standard option and RSU structures proposed for Dr. Elliston's awards, which will be granted pursuant to the AHT 2020 Equity Incentive Plan (as amended May 2021) and governed by separate Stock Option Award Agreement and RSU Award Agreement documents.
The equity acceleration provisions — 25% acceleration of unvested awards upon a non-CIC qualifying termination, and 100% acceleration upon a CIC qualifying termination — do not create additional Wage Act concerns. These provisions modify the vesting schedule but do not convert the equity awards into cash wages. The accelerated vesting is governed by the terms of the Equity Incentive Plan and the individual award agreements, and the resulting equity interests remain subject to the same market-based value fluctuations as any other equity holding.
No specific Wage Act drafting concerns have been identified with respect to the equity compensation component of Dr. Elliston's package.
G. Other Benefits and Perquisites
The remaining elements of the proposed compensation package — consisting of various benefits and perquisites — do not raise material Wage Act concerns. We address each briefly for completeness:
COBRA Continuation (Employer-Paid Premiums). The proposed Agreement provides for employer-paid COBRA premiums for twelve (12) months following a non-CIC qualifying termination and eighteen (18) months following a CIC qualifying termination. Employer-paid health insurance premiums are not classified as "wages" under the Wage Act; they represent continuation of health insurance benefits and are governed by COBRA and applicable state insurance law rather than the Wage Act's wage-payment provisions.
Life Insurance ($1,150,000 Coverage, Equal to 2× Base Salary). The employer-provided group life insurance benefit is not wages. It is a standard employee benefit governed by the applicable insurance policy and ERISA, rather than by the Wage Act.
401(k) Match (Up to 4%). Employer contributions to the Company's 401(k) plan are not wages under the Wage Act. These contributions are governed by ERISA, the Internal Revenue Code, and the terms of the plan document.
Relocation Allowance (Up to $75,000). The proposed Agreement includes a relocation allowance of up to $75,000. This provision is not expected to be utilized, as Dr. Elliston currently resides in Massachusetts at 87 Laurel Hill Road, Wellesley, Massachusetts 02481, and will not be relocating in connection with the engagement. If the allowance were utilized, it would be characterized as a reimbursement of relocation expenses rather than wages, and would not implicate the Wage Act.
Professional Development Allowance ($15,000/Year). The annual professional development allowance is a reimbursement for business-related expenses (e.g., conference attendance, continuing education, professional memberships) and is likely not wages under the Wage Act. To preserve this characterization, the allowance should be structured as a reimbursement — requiring submission of receipts or other documentation of qualifying expenses — rather than as a fixed supplemental payment. If structured as a flat annual payment without any documentation or substantiation requirement, there is a risk that it could be recharacterized as additional compensation constituting wages. We recommend that the Agreement require Executive to submit expense documentation and that AHT reimburse qualifying expenses up to the annual cap.
Executive Physical Exam Program. The employer-sponsored executive health screening benefit is not wages; it is an in-kind employer-provided benefit.
IV. Specific Drafting Recommendations
Based on the analysis set forth above, we provide the following consolidated drafting recommendations for the Executive Employment Agreement. These recommendations supplement the analysis-specific recommendations set forth in Section III and are intended to be implemented in the drafting of the Agreement.
A. Annual Bonus Provisions
1. Define the performance period (e.g., the Company's fiscal year, currently January 1 through December 31) and the applicable performance metrics (to be established annually by the Board or Compensation Committee) with sufficient specificity that it is clear when the bonus transitions from contingent compensation to earned wages.
2. State expressly that the annual bonus is not "earned" until (a) the end of the applicable performance period and (b) the determination by the Board or Compensation Committee that the applicable performance metrics have been satisfied. Until both conditions are met, the bonus remains contingent and does not constitute wages under the Act.
3. Avoid any provision that forfeits an already-earned bonus solely based on termination of employment before a specified payment date. If Executive's employment terminates after the close of a performance period but before the bonus is paid, and the applicable metrics have been satisfied, the bonus is wages and must be paid.
4. For the pro-rata bonus upon a qualifying termination, specify the calculation methodology with precision (e.g., target bonus multiplied by a fraction, the numerator of which is the number of days employed during the fiscal year through the date of termination and the denominator of which is 365 or 366, as applicable, with the actual bonus amount further adjusted for actual performance to the extent determinable) and specify the payment timeline (e.g., payable at the same time annual bonuses are paid to other similarly situated executives of the Company, but no later than March 15 of the calendar year following the year in which the termination occurs).
5. Preserve the Board's and Compensation Committee's discretion over annual bonus determinations to the extent consistent with Wage Act compliance. The Agreement may state that the Board retains discretion to adjust bonus amounts within the range of zero to 150% of the target bonus, based on its assessment of company and individual performance, provided that once a specific bonus amount has been determined and communicated to Executive, the determined amount constitutes wages and shall be paid without further conditions.
B. Signing Bonus Clawback Provisions
1. Structure the clawback as an affirmative repayment obligation on the part of Executive, not as a deduction from, setoff against, or withholding of final wages or other compensation owed by the Company.
2. Expressly prohibit AHT from offsetting or deducting the clawback amount against Executive's final base salary, earned bonus, accrued PTO payout, severance payments, or any other wages, compensation, or benefits owed to Executive at or following termination.
3. Implement a declining-balance approach to reduce the clawback amount ratably over the 24-month period, as follows:
(a) If the triggering event occurs during the first twelve (12) months following the Start Date, Executive shall repay 100% of the signing bonus ($250,000).
(b) If the triggering event occurs during months thirteen (13) through twenty-four (24) following the Start Date, Executive shall repay 50% of the signing bonus ($125,000).
4. Limit the triggering events for the clawback to (a) voluntary resignation by Executive without Good Reason (as defined in the Agreement), and (b) termination of Executive's employment by the Company for Cause (as defined in the Agreement). The clawback shall not be triggered by termination without Cause, resignation for Good Reason, death, or Disability, in any of which events Executive shall retain the full signing bonus without any repayment obligation.
5. Specify a reasonable repayment timeline (e.g., Executive shall repay the applicable clawback amount within sixty (60) days following the date of termination) and confirm that the repayment obligation shall survive the termination of the Agreement and shall be enforceable as an independent contractual obligation.
C. Severance and Release Provisions
1. Clearly bifurcate accrued wages (the "Accrued Obligations," payable regardless of the circumstances of termination and without condition on release execution) from severance payments and benefits (the "Severance Benefits," conditioned on timely execution and non-revocation of the Release Agreement).
2. Specify in unambiguous terms that execution and non-revocation of the General Release of Claims (Schedule B — Form of Release Agreement) is a condition precedent only for the Severance Benefits, and that the Accrued Obligations — including accrued but unpaid base salary, earned but unpaid annual bonus, accrued but unused PTO, and unreimbursed business expenses — shall be paid to Executive on the timeline required by applicable law regardless of whether Executive executes the Release Agreement.
3. The Release Agreement at Schedule B should provide for a twenty-one (21) day consideration period and a seven (7) day revocation period, consistent with the requirements of the Age Discrimination in Employment Act ("ADEA") and the Older Workers Benefit Protection Act ("OWBPA"), given that Dr. Elliston's age at the anticipated start date is relevant to ADEA compliance. If the termination occurs in connection with a group reduction in force or other program affecting multiple employees, the Release Agreement should be modified to provide the forty-five (45) day consideration period required by OWBPA in such circumstances.
4. Confirm that the severance payment timeline complies with both the Wage Act and Section 409A of the Internal Revenue Code. Severance payments should commence on the first regular payroll date following the effective date of the Release Agreement (i.e., the date on which the seven-day revocation period expires without revocation), subject to any adjustments required for Section 409A compliance, including the potential "catch-up" payment of amounts that would have been paid during the consideration and revocation period had the Release been immediately effective.
D. Final Pay Provisions
1. Include an express covenant by the Company to pay all Accrued Obligations on the date of discharge (for any involuntary termination, including termination without Cause and termination for Cause) or the next regular payday (for voluntary resignation), in compliance with M.G.L. c. 149, § 148.
2. Confirm that accrued but unused PTO shall be paid out in cash, at Executive's then-current base salary rate, upon any termination of employment, regardless of the reason for termination.
3. Address final paycheck logistics, including a provision stating that the final payment shall be delivered by direct deposit to the bank account on file (if Executive has authorized direct deposit and the account remains active) or by check mailed to Executive's last known home address, or such other address as Executive may designate in writing, if direct deposit is not feasible or has been revoked.
E. General Protective Language
1. Include a savings clause providing that, if any provision of the Agreement is found by a court of competent jurisdiction to violate the Wage Act or any other applicable law, such provision shall be automatically reformed to the minimum extent necessary to achieve compliance with the Act, without affecting the validity or enforceability of the remaining provisions.
2. Include an express acknowledgment that nothing in the Agreement is intended to, or shall be construed to, limit, waive, or diminish Executive's rights under the Massachusetts Wage Act, M.G.L. c. 149, §§ 148–150, or any other applicable federal, state, or local law governing the payment of wages.
3. Avoid any broad "setoff," "recoupment," or "netting" provision that could be construed as authorizing the Company to deduct, withhold, or offset amounts from Executive's wages. If any setoff or recoupment right is included (e.g., for the signing bonus clawback), it must be narrowly drafted and must expressly exclude any setoff against wages, as defined by the Wage Act.
V. Interaction with Other Legal Analyses
The Wage Act analysis set forth in this memorandum intersects with several other legal issues that are being addressed by other members of the Calderwood & Harkness team. We identify the principal interactions below to ensure coordination across the relevant workstreams.
Massachusetts Noncompetition Agreement Act (M.G.L. c. 149, § 24L). The proposed Employment Agreement includes a twelve (12) month post-termination non-competition covenant. Under the Massachusetts Noncompetition Agreement Act, which took effect on October 1, 2018, non-competition agreements must be supported by consideration, and the employer must provide "garden leave" or other mutually agreed-upon consideration during the restricted period. The proposed Agreement provides garden-leave payments of $287,500 (equal to 50% of base salary) during the twelve-month non-compete period. This garden-leave payment is separate consideration for the non-compete obligation and should not be classified as deferred wages under the Wage Act. The garden-leave payment is conditioned on Executive's compliance with the non-compete and is consideration for the restriction on Executive's post-employment activities, not compensation for services previously rendered. The Noncompetition Agreement Act issues, including the enforceability of the non-compete covenant and the adequacy of the garden-leave consideration, are analyzed separately in Nadia Petrov's memorandum dated July 25, 2022.
Section 409A Compliance. The timing of severance payments must be carefully coordinated with the requirements of Section 409A of the Internal Revenue Code to avoid both Wage Act penalties and the 20% excise tax imposed by Section 409A on non-compliant deferred compensation arrangements. Where the Wage Act requires immediate payment of earned wages at termination but Section 409A may require deferred payment of certain separation benefits, the Agreement must be structured to satisfy both regimes simultaneously. Gregory Tan is addressing the Section 409A analysis in a forthcoming memorandum (subsequently dated August 22, 2022), and we will coordinate with him to ensure that the severance payment timeline in the Agreement is compliant with both the Wage Act and Section 409A.
Section 280G / "Golden Parachute" Analysis. The proposed CIC severance provisions could result in "excess parachute payments" within the meaning of Section 280G of the Internal Revenue Code, triggering a 20% excise tax on Executive under Section 4999 and a loss of the employer's deduction under Section 280G. The Agreement includes a "best net" cutback provision, which reduces CIC severance if the after-tax benefit to Executive would be greater post-reduction than with full payment and imposition of the excise tax. This cutback mechanism must be implemented in a way that does not result in the withholding or reduction of amounts classified as earned wages under the Wage Act. The 280G analysis is being coordinated by Gregory Tan and Nadia Petrov, with supporting calculations to be set forth in the CIC Severance Calculation Spreadsheet (subsequently dated September 2, 2022). We will coordinate with them to ensure that the cutback operates only on true severance and non-wage components of the CIC package.
Massachusetts Non-Solicitation and Non-Disclosure Enforceability. In addition to the non-competition covenant, the proposed Agreement includes non-solicitation and non-disclosure covenants. The garden-leave payment and any post-termination compensation obligations may implicate Wage Act timing rules to the extent they are classified as wages rather than consideration for restrictive covenants. The enforceability of the non-solicitation and non-disclosure provisions, and their interaction with the Wage Act, is addressed separately in Nadia Petrov's memorandum dated August 8, 2022.
VI. Conclusion and Next Steps
The Massachusetts Wage Act imposes strict and unforgiving requirements on the payment of wages, with mandatory treble damages for any violation and no judicial discretion to mitigate penalties based on good faith, inadvertence, or other equitable considerations. Given the substantial dollar amounts involved in Dr. Elliston's proposed compensation package — including first-year total cash compensation at target of approximately $1,256,250, CIC severance of up to approximately $2,051,200 (excluding equity), and a $250,000 signing bonus — the financial exposure for non-compliance is significant. At treble damages, the aggregate potential exposure could exceed several million dollars, exclusive of attorneys' fees, costs, and the risk of individual liability for AHT's officers.
The highest-risk elements of the proposed package are:
1. The $250,000 signing bonus clawback, which must be structured as an independent repayment obligation rather than as a deduction from or offset against wages. A clawback provision that operates as a wage deduction would almost certainly violate the Wage Act and expose AHT to mandatory treble damages of $750,000, plus attorneys' fees and costs.
2. The annual bonus provisions, which must be drafted to avoid the forfeiture of already-earned bonuses based solely on employment status at the time of payment. Once the performance period has concluded and the applicable metrics have been satisfied, the bonus is wages, and any forfeiture or clawback of the earned amount would constitute a Wage Act violation.
3. The final pay timing requirements upon termination, which require same-day payment of all accrued wages upon involuntary termination (including termination for Cause) and next-regular-payday payment upon voluntary resignation. AHT must ensure its payroll systems can process final pay on the required timeline, as even a single day's delay triggers mandatory treble damages.
The drafting recommendations set forth in this memorandum have been incorporated into the first draft of the Executive Employment Agreement, which was circulated to the deal team on August 5, 2022. The Agreement will be further refined as negotiations with Fielding & Rowe LLP (Catherine A. Fielding, counsel for Dr. Elliston) progress, and we will continue to monitor developments in Wage Act jurisprudence that may affect the analysis.
Devon Archer and Nadia Petrov are available to discuss these recommendations with AHT's General Counsel Aaron Whitfield and Chief Human Resources Officer Lisa Murakami at their convenience, and to coordinate with Hargrove & Sinclair CPAs (Malcolm R. Sinclair) on any tax-related timing considerations that intersect with Wage Act compliance. We recommend scheduling a call during the week of August 8 to review the first draft of the Agreement and to address any questions from the AHT team before circulation to Dr. Elliston's counsel.
This memorandum is a privileged and confidential attorney work product prepared by Calderwood & Harkness LLP for the exclusive use of the addressees in connection with the engagement described herein. It is protected by the attorney-client privilege, the work product doctrine, and all other applicable privileges and protections. This memorandum does not constitute legal advice to any person or entity other than the addressees and should not be relied upon by any third party. Distribution, copying, or disclosure of this memorandum or its contents without the express written consent of Cal

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