In its recent decision in Pachter v. Bernard Hodes Group, Inc., the New York Court of Appeals provided long-awaited clarity to employers regarding whether “executives” are considered “employees” covered by Article 6 of the New York Labor Law and when a commission is “earned” and becomes a “wage” subject to Section 193’s prohibition on deductions. Pachter v. Bernard Hodes Group, Inc., 10 N.Y.3d 609, 861 N.Y.S.2d 246 (2008).

With respect to the first issue of whether “executives” are considered employees for purposes of Article 6, the Court ruled that executives are protected by the Labor Law except where they are expressly excluded from coverage by the statute. Consequently, the Court found that because Section 193 does not explicitly exclude executives from its coverage, executives are subject to Section 193’s general prohibition on deductions from earned wages.

Critically for employers, with respect to the second issue of when a commission is an “earned wage” subject to Section 193, the Court held that even in the absence of a written agreement, deductions from commissions for business-related expenses are permissible where they are based on a commission formula agreed upon by the employer and employee, either expressly or implicitly. In such circumstances, commissions are not “earned” until the deductions are made.

In Pachter, the plaintiff was a long-term employee who had been paid on a commission basis for many years and was supplied with monthly compensation statements detailing her billings and the expense-related deductions subtracted from them. The Court concluded that there was an implied contract between Pachter and her employer, and that nothing in Section 193 prohibited the parties from structuring the commission formula so that Pachter’s commissions were earned and calculated only after certain deductions were taken from a percentage of her gross billings.

The Pachter decision should give peace of mind to many employers who, based on the prior uncertainty and unpredictability that existed in the law, feared potential liability in New York for improper deductions. It is now clear that New York employees paid on a commission basis can have adjustments made for business-related expenses if those deductions are part of an agreed-upon commission formula, and that such commissions are not “earned” until after such deductions are made. Pachter is particularly significant for employers in the financial services industry and other industries where employers fashion compensation arrangements with their employees in which businessrelated expenses are deducted as part of the calculation of commissions. The decision could lead to a greater degree of efficiency in employment relationships as employers can now incentivize employees to control costs and in return earn a greater piece of the revenue they generate.

Although Pachter increases the flexibility employers have in structuring compensation arrangements with their employees, the safer route for employers still is to have a written agreement or compensation plan explaining the commission formula and providing that commissions are not earned until enumerated adjustments are made. A written agreement also is advisable to avoid the effect of a 2007 amendment to Section 191 of the New York Labor Law, which provides that in the absence of a written agreement for a commissioned salesperson there is a presumption that the terms presented by the salesperson “are the agreed terms of employment.”