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N.Y.'s High Court Rules Executives Are Covered Employees Under Certain Labor Law Provisions

June 23, 2008

N.Y.'s High Court Rules Executives Are Covered Employees Under Certain Labor Law Provisions

June 23, 2008

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Court Also Addresses When Commissions Become Wages Subject to Protection

On June 10, 2008, New York's highest court issued an important ruling for New York employers, resolving unsettled issues involving the scope of protections afforded to executives under the Labor Law and when an employer may deduct business expenses from commissioned earnings. Pachter v. Bernard Hodes Group, 2008 NY Slip Op. 05300 (June 10, 2008). In responding to two certified questions from the U.S. Court of Appeals for the Second Circuit, the New York Court of Appeals ruled that (i) an executive is entitled to certain protections extended to employees under Article 6 of the Labor Law, including regarding limitations on deductions from wages; and (ii) the parties' express or implied agreement determines when a commission becomes a "wage" subject to the deduction limitations in Article 6. In the absence of such agreement, courts will find that a commission becomes a wage when the employee produces a "ready, willing and able buyer."

Factual Background

Plaintiff Elaine Pachter was employed as a vice president for defendant Bernard Hodes Group, Inc. from April 1992 to December 2003. The company specialized in providing recruitment, marketing and staffing services to various clients, and Pachter's primary duties involved selling media advertisements. Although Pachter had the option of receiving a fixed salary, she instead chose to be compensated solely on a commission basis. Pachter's commission earnings were based on a percentage of the amount billed to the client, minus finance charges, uncollectible debts, Pachter's travel and entertainment expenses, compensation for any assistants utilized and certain other charges. Although there was no written commission contract, each month Pachter received a commission statement that listed her total billings and the percentage of those billings that represented her gross commission. Any expenses associated with her sales were then deducted from her gross commission to reach the net amount of income earned for that period. Pachter was aware of the charges the Company deducted from her gross commission and did not object to the compensation arrangement for more than a decade.

When Pachter left her employment in December 2003, she brought suit against the Company on grounds that Section 193 of New York's Labor Law precludes the Company from subtracting business expenses in arriving at her commission income. Specifically, Section 193 prohibits an employer from making any deduction from the wages of an employee unless permitted by law or authorized by the employer for insurance premiums, pension or health and welfare benefits, contributions to charitable organizations, union dues and similar payments for the benefit of the employee. In response, the Company argued that (i) Pachter was an "executive" at the company and was therefore not an employee for purposes of that provision of the Labor Law and, in any event, (ii) the deductions were not taken from her commission but were used to calculate her earned commission. The U.S. District Court for the Southern District of New York rejected the Company's argument and granted summary judgment to Pachter, ruling that executives are covered by Section 193 and that the adjustments made to Pachter's gross commission were illegal deductions from wages.

On appeal, the Second Circuit certified two questions of law to the New York State Court of Appeals: (i) is an executive entitled to the protections extended to employees in Article 6 of the Labor Law, which prevents employers from making certain deduction from an employee's wages, and (ii) assuming that executives are employees for purposes of that statute, when, in the absence of a written agreement between the employer and employee, does an earned commission become a "wage" subject to the limitations on deductions.

The Decision

Article 6 of the New York Labor Law regulates the payment of wages by employers. Following the Court of Appeals' decision in Gottlieb v. Kenneth D. Laub, 82 NY2d 457 (1993), there was a split in authority in state and federal courts on the issue of whether executives are covered by Article 6. The Pachter court resolved the issue and held that executives are entitled to the protections of Article 6 based on the express language of Section 190(2), which defines an "employee" as "any person employed for hire by an employer in any employment" - a definition, as explained by the court, that plainly embraces executives. The court bolstered its ruling by noting that the statute expressly excluded executives from certain other of its provisions, making clear that executives were intended to be included within subsection (2)'s general definition of employee.

The court then turned to the second certified question regarding when Pachter's "earned" commissions are to be deemed "wages" subject to the deduction limitations in Article 6. It was undisputed that certain business expense deductions from Pachter's final compensation were not within the categories of permissible deductions set forth in Section 193. Their validity, therefore, depended on when Pachter's commission was "earned" and became a wage that was subject to the restrictions of Section 193 - if the adjustments were made before the commissions were earned, Section 193 did not prohibit them. However, if the charges were deducted after her commissions were earned, the Company violated the statute.

The court concluded that, in the absence of a written contract, a commission is earned and becomes a wage for purposes of the Labor Law by the parties' express or implied agreement. Although the parties in Pachter did not have an express written agreement, the court found an implied contract based upon the parties' extensive course of dealing over an 11-year period and the written monthly compensation statements through which Pachter was on notice of and acquiesced to the deductions. The court noted that, if there is no express or implied contract, a court will look to the default common law rules that tie the earning of a commission to the employee's production of a "ready, willing and able buyer."

What This Means for Employers

The Pachter decision provides important clarification for New York employers. The ruling makes clear that executives fall within the ambit of protections afforded to employees under Article 6 of the Labor Law and that employers may not make any deductions from an executive's wages unless permitted by law or authorized for insurance, pension or health benefits, union dues, or otherwise for the benefit of the employee. The dispute in Pachter may have been avoided if the Company had a written agreement expressly stating that Pachter's commissions were not earned until after the Company deducted certain expenses. The case underscores the importance of having in place a detailed written commission agreement with a commissioned salesperson. As we reported last fall, effective October 16, 2007, New York State legislature amended Section 191.1(c) of the Labor Law to expressly require employers to put into place written commission agreements with commissioned salespersons specifying each detail of the commission arrangement. Failure to do so creates a presumption that the salesperson's understanding of the arrangement is accurate. Thus, had this case arisen after this statutory amendment, the employer may not have fared as well on the expense reduction issue.

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