In a decision that is good news to employers, the New York State Court of Appeals held that an employer’s commission plan or the parties’ course of dealing determines when a commission is earned and that prior to such “earning”, New York’s wage deduction limitations are inapplicable.  Pachter v. Bernard Hodes Group, 2008 NY Slip Op. 05300 (June 10, 2008).  The court also held that “executives” are covered by the New York State Labor Law.  In doing so, the court distinguished a prior holding in Gottlieb v. Kenneth D. Laub & Co., 82 N.Y.2d 457 (1993), stating that Gottlieb stands only for the limited proposition that attorneys’ fees are not available for a wage claim brought solely as a common law breach of contract action.

The decision responds to questions that were referred by a federal appeals court in New York.  In 2007, the United States Court of Appeals for the Second Circuit certified two questions of law for the New York State Court of Appeals:

1. whether “executives” are covered by the New York State Labor Law’s “Payment of Wages” provision (Article 6, Section 190, et seq.); and
2. when is a commission earned and becomes a “wage” subject to the Labor Law provision (Section 193) imposing significant limitations on wage deductions.

In her role as Vice-President of Bernard Hodes Group, Plaintiff Elaine Pachter arranged for media advertising for clients.  She had the option of receiving a fixed salary, but chose to be compensated on a commission basis.  Her commission earnings were calculated pursuant to a formula.  When a client agreed to buy media, Hodes would advance payment to the media company and the client would subsequently reimburse Hodes and pay a fee for Pachter’s services.  When the client was billed, Pachter received a percentage of the amount billed minus particular charges - client receipts were reduced by certain business costs, such as finance charges for late payments, losses attributable to errors in placing advertisements, uncollectible debts and Pachter’s travel and entertainment expenses. In addition, Pachter chose to work with an assistant, and half of the assistant’s salary was deducted from Pachter’s percentage of billings.

There was no written commission plan.  Each month, Pachter received a commission statement that listed her total billings and the percentage of those billings that represented her gross commission. The expenses attributed to her activities and any advances she had drawn from her commission account were then deducted to reach the net amount of income she had earned for that period. Pachter concedes that she was aware of the charges Hodes subtracted from her gross commissions and acquiesced in the compensation scheme for over a decade.

After Pachter left her employment, she filed suit alleging that the deductions in commissions were unlawful under Section 193, which, with limited exceptions that are not applicable here, only permits deductions that are “for the benefit of” employees.  Hodes made two arguments: 

1. Pachter was exempt from Article 6 of the Labor Law due to her executive status; and,
2. in the alternative, Section 193 was inapplicable as these were not deductions from commissions but rather part of the commission calculation.

The U.S. District Court for the Southern District of New York rejected Hodes’ arguments and granted Pachter summary judgment, concluding 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 the two question of law for the New York State Court of Appeals.

Concluding that executives are not exempt from the provisions of Article 6 of the Labor Law, the court relied on the express language of the statute.  It pointed out that the definition of “employee” in Section 190 did not exclude “executives” and that other provisions of Article 6, specifically, Section 192(2) and Section 198-c(3), exclude “executives” from such provisions. (Section 192(2) permits mandatory direct deposit for “executives” who earn over $900 per week while for all other employees, mandatory direct deposit is prohibited.  Section 198-c provides that, unlike all other employees, “executives” who earn over $900 per week may not assert a statutory claim for certain fringe benefits, including bonuses and unpaid vacation.) The court said, “If, as Hodes claims, executives are not employees in the first instance, these two unambiguous exclusions would be wholly superfluous; there would be no need to eliminate executives from the enumerated subcategories of employees if they were not within the ambit of the general definition of ‘employee’ in subdivision 2 [of Section 190].”  

It is vital to note, however, that this case underscores the exclusion of executives from certain Labor Law protections.  Most important, while an exempt “executive” who earns over $900 per week is covered by the general provisions of Article 6 as to payment of agreed upon salary, such an individual does not have a right to make any claim for fringe benefits, including bonuses, pursuant to Section 198-c.

In ruling that the adjustments to Pachter’s commission were made prior to it being earned, and thus not subject to the deduction limitations set forth in Section 193, the court applied common-law principles.  In the absence of a written agreement, the court stated, the general rule is that Pachter earned a commission when the client made its commitment to buy advertising.  However, the court went on to state that Pachter had agreed over an 11-year period that her commission calculation would include reductions for non-payment of invoices as well as for part of the cost of her assistant.  Pachter’s acceptance of her monthly compensation statements supported this conclusion.  The court then accepted Hodes’ position and concluded, “in the absence of a governing written instrument, when a commission is ‘earned’ and becomes a ‘wage’ for purposes of Labor Law article 6 is regulated by the parties’ express or implied agreement, or if no agreement exists, by the default common-law rule that ties the earning of a commission to the employee’s production of a ready, willing and able purchaser of services.” 

In New York, employers must have written commission agreements for all commission salespersons.  Further, even if an employee does not fall into this category, a commission agreement is strongly recommended.  This decision in Pachter provides a high level of protection for any New York employer that promulgates a commission plan in which all calculations are set forth as being made prior to a determination of when the commissions are earned.  Through a well-drafted plan, an employer can avoid claims that the employer’s practice is to make unlawful deductions in violation of Section 193.   New York employers should scrutinize all current commission plan language to maximize and protect their rights.