New York Court of Appeals Decides That Executives Are “Employees” Under Wage Deduction Provision of State Labor Law and Provides Guidance on Accrual of Commission Rights

On June 10, 2008, the New York Court Appeals ruled that an executive is an “employee” protected by the State Labor Law provision which strictly limits the deductions that may lawfully be taken from wages. The Court also decided that a sales commission is earned, and receives the protections accorded to employee wages, on the basis of the parties’ express or implied agreement. Absent any such agreement, commissions are payable as wages pursuant to the common law rule that a commission is earned when the employee produces a buyer “ready willing and able” to purchase the employer’s goods, services or property on the employer’s terms. Pachter v. Bernard Hodes Group, Inc., No. 86 (June 10, 2008).

The plaintiff in the Pachter case had been employed by the defendant employer as an advertising sales vice president, and she was paid on the basis of commissions earned from sales of advertising she placed for the employer’s clients. After eleven years of employment, the plaintiff left the company and brought suit for unpaid wages, claiming that certain deductions taken by the employer from her gross commissions constituted unlawful deductions from her wages, in violation of Section 193 of the New York State Labor Law. Section 193 prohibits an employer from making “any deduction from the wages of an employee” unless the deduction is permitted by law, or the employee gives a written authorization allowing deductions specifically for “insurance premiums, pension or health and welfare benefits, contributions to charitable organizations, payments for United States bonds, payments for dues and assessments to a labor organization, and similar payments for the benefit of the employee.” The basis for the plaintiff’s claim was that the employer had reduced the plaintiff’s gross commissions on account of certain business costs including finance charges for late payments from the client, uncollectible client charges, and travel, entertainment and marketing expenses. The gross commissions and charges had been itemized on statements provided on a monthly basis to the plaintiff for over a decade during her employment. Her suit sought reimbursement for the deductions and other remedies.

The plaintiff prevailed before the U. S. District Court and the employer appealed to the U.S. Court of Appeals for the Second Circuit. The Second Circuit referred the case to the New York Court of Appeals (the State’s highest court) to address two questions of unsettled State law. The Second Circuit first asked whether executives, such as an advertising sales vice president, are exempt from the wage deduction prohibitions of Labor Law § 193. It was conceded by the employer that in the event the plaintiff was covered by Section 193, the reductions made in the plaintiff’s gross commissions would not be permissible.

On this first question, the New York Court of Appeals concluded that executives are “employees” entitled to the protections of Section 193. The Court observed that executives are removed from the definitions of certain subcategories of employees in the various sections of the Labor Law, but those exceptions do not limit the scope of the general definition of an employee as “any person employed for hire by an employer in any employment” in Labor Law § 190 which, the Court concluded, “plainly embraces executives.” The Court of Appeals particularly noted that if executives were excluded from the statutory definition of “employee,” then the Labor Law’s prohibition on sex discrimination in employee pay would not apply to executives. The Court asserted that this was an absurd result that the New York State Legislature surely did not intend with respect to the anti-discrimination provisions of the Labor Law. Consequently, the Court ruled that executives are employees for purposes of the Labor Law, except where expressly excluded. There being no specific exclusion of executives in the terms of Section 193, the statute protected the plaintiff from deductions from her wages.

The second issue referred by the federal appeals court to the New York Court of Appeals related to the timing under which commissions are earned: when does a commission payment accrue and constitute wages such that it is protected from deductions by Section 193? The Court concluded that, absent an express or implied agreement between the parties to the contrary, a commission accrues and is earned when the employee produces a buyer “ready, willing and able” to enter into a purchase upon the employer’s terms. The Court went on to note that an employer and employee are free to depart from that common law rule by entering into a different arrangement. They may, for example, provide that the calculation of a sales commission will include certain downward adjustments from gross sales, billings or receivables. In that event, the employee’s commission is not “earned” or “vested” until application of the agreed upon formula results in a net commission. The Court finally concluded that the plaintiff’s eleven year course of dealing with her employer made clear that her commission would be earned and vested only after the specified deductions were taken from her gross billings. Her commissions became wages for purposes of Labor Law § 193 only after the new commission was calculated, and she therefore had no claim for unauthorized deductions.

The significance of this decision for management is two-fold. First, it is now clear that executives and all others employed on a wage, salary or commission basis are protected by Section 193 of the Labor Law regulating deductions from their earned compensation. Deductions from the wages of executives, like other employees, are lawful only if they are for the permissible purposes enumerated in the statute and only if authorized in writing by the affected employee. Second, commissions accrue and are earned as wages pursuant to the employer’s and employee’s agreement or course of dealing, and in the absence of such an express or implied agreement, an employee’s commission is earned and becomes statutorily protected wages when the employee presents a buyer ready, willing and able to purchase the offered goods, services or property on the terms acceptable to the employer. An amendment to the New York State Labor Law enacted in 2007 already required that the terms upon which commissioned salespersons are compensated be set forth in a written agreement. Particularly in view of the Court of Appeals decision in Pachter, to avoid unnecessary litigation over commission compensation it is now essential for New York employers to spell out the full terms of the commission calculation in a written agreement executed by both the employee and the company. The agreement should set forth all material terms, including the treatment of commissions owed to the employee when payment on a sale occurs after the employment has terminated.

If you have any questions about the implications and application of the Pachter case, please contact any of the wage and hour attorneys in our New York office.