In Pachter v. Bernard Hodes Group, Inc. (October 12, 2007), the United States Court of Appeals for the Second Circuit requested that the New York Court of Appeals resolve two “undecided questions arising under Article 6, Section 193 of the New York Labor Law.” Section 193 of the Labor Law provides that “[n]o employer shall make any deduction from the wages of an employee,” except for authorized deductions for insurance premiums, pension or health and welfare benefits, contributions to charitable organizations, payments for US bonds, union dues and “similar payments for the benefit of the employee.”3 The Second Circuit stated that the resolution of the instant case turned on “(1) whether an executive is an ‘employee,’ and consequently covered by [the Labor Law’s] provisions limiting deductions from wages and (2) when are commissions ‘earned’ and consequently ‘wages’ which are subject only to limited subsequent deductions?”

From April 1992 to December 2003, plaintiff-appellee Elaine Pachter (“Pachter”) was employed by defendant-appellant Bernard Hodes Group, Inc. (“Hodes”), which is a recruitment, marketing and staffing services company. Pachter worked as an account representative with the title of Vice President, Management Supervisor and her responsibilities included preparing, placing and servicing advertisements in various forms of media for the clients of Hodes. As part of its business, Hodes advanced payment to the various media companies in which advertisements were placed for its clients and then Hodes obtained reimbursements from its clients for these amounts. Pachter’s compensation, which exceeded US$100,000 in many years, consisted of commissions based on a percentage of the monthly billings to Hodes’s clients including both the amounts previously advanced by Hodes and a service fee charged by Hodes for Pachter’s services. Hodes subjected Pachter’s monthly commissions to the following deductions for business costs that Hodes attributed to Pachter: (i) finance charges of 1 percent or 1.5 percent when Pachter failed to obtain payment from the client within 60 and 90 days respectively; (ii) 50 percent of the cost of Pachter’s assistant’s salary and benefits; (iii) 50 percent to 100 percent of losses allocated to Pachter when her clients refused to pay for particular placements of advertising because of errors that occurred in purchasing or placing the advertisements; (iv) 50 percent of losses for bad debts (i.e., where clients were unable to pay their bills); (v) 50 percent of any amounts that Pachter’s clients refused to pay for reasons other than errors and (vi) Pachter’s travel and entertainment expenses, marketing expenses and other work-related expenses advanced by Hodes.

Pachter filed a complaint in the US District Court for the Southern District of New York alleging that the above deductions constituted unlawful wage deductions in violation of Section 193 of the Labor Law. Among other things, Hodes asserted that Section 193 did not apply to Pachter because she was an “executive” and not an “employee,” and also that the deductions were part of the formula that determined the amount of Pachter’s wages rather than deductions from her wages. Both parties moved for summary judgment. The District Court granted summary judgment for Pachter, concluding that Section 193 covered executives and that the deductions at issue constituted deductions from Pachter’s wages. The District Court entered a judgment in favor of Pachter in the amount of US$153,817.51 (which was the amount of the deductions), statutory interest and lawyer’s fees as mandated by the Labor Law. Hodes appealed to the Second Circuit.

Whether an “Executive” Is an “Employee” Under Section 193?

With respect to the first question, the Second Circuit noted that Section 190 of the Labor Law defines “employee” as “any person employed for hire by an employer in any employment” and that “[b]ased on [Sections 190 and 193], Section 193 appears to broadly apply to all ‘employees’ including executives.” The Second Circuit also pointed to the provisions of Article 6, Section 191, which sets forth the frequency within which employers must pay wages to “manual workers,” “railroad workers,” “commission salesmen” and “clerical and other worker[s].” The Second Circuit noted that the definitions of the latter three categories—i.e., railroad workers, commission salesmen and clerical and other workers—exclude employees working in an executive capacity.4 The Second Circuit stated, however, that “[its] consideration of Section 190 in relation to Sections 191 and 193 suggests that Section 193 applies to all employees regardless of their position, while Section 191 applies only to non-executive employees in the specified categories.”

According to the Second Circuit, however, “New York courts…do not agree on whether Section 193 (or any other provisions of Article 6) protects executives.”5 The Second Circuit stated further that the disagreement stems from “varying interpretations” of the 1993 decision of the New York Court of Appeals in Gottlieb v. Kenneth D. Laub & Co. The New York Court of Appeals stated in Gottlieb that “[e]xcept for manual workers, all other categories of employees entitled to statutory protection under [Section 191] are limited by definitional exclusions of one form or another for employees serving in an executive, managerial or administrative capacity” and “[c]ertainly nothing in the language of [Article 6] suggests that it was intended to provide any remedy whatsoever for the successful prosecution of a common-law civil action for contractually due remuneration on behalf of employees who in all other respects are excluded from wage enforcement protection under recodified Article 6 of the Labor Law.” (Emphasis added). In reliance on Gottlieb, some federal courts and New York appellate courts have held that executives are covered by Section 193 and other federal courts and New York appellate courts have held that executives are not covered by Article 6 altogether. The Second Circuit therefore stated that “[w]hile our inclination would be to defer to the text of Section 193 and conclude that executives are covered, we are reluctant to do so in light of the sharp disagreement in the courts over this issue of state law.” “[S]ince its resolution potentially affects large numbers of employees throughout New York”—potentially including also persons employed in administrative or professional capacities—the Second Circuit stated that the question is best resolved by the New York Court of Appeals.

When Are Commissions “Earned” and Therefore Subject to Section 193?

Even if Pachter is covered by Section 193 as an “employee,” Hodes claims that the deductions at issue were merely subtractions pursuant to a commission formula rather than deductions from wages which would be prohibited by Section 193. Section 190 defines “wages” as “the earnings of an employee for labor or services rendered, regardless of the amount or whether the amount of earnings is determined on a time, piece, commission or other basis.” Hodes argued that the commissions are not earned by Pachter and therefore not wages until after Hodes made all agreed-to adjustments to the commissions. The Second Circuit noted that when a commission becomes “earned” usually depends on the terms of the parties’ agreement regarding the commissions. Although no written agreement exists in this case, the common law developed the following rule that broadly applies to “conventional” brokerage relationships: In the absence of a written agreement, a commission is deemed to have been earned “upon sale.”6

The Second Circuit concluded that “[t]his appeal presents features of a conventional brokerage relationship” because “Pachter arguably brokered the sale of advertising space between Hodes and its clients.” Under the common law rule, “her commission could be considered ‘earned’ either when: (1) payment is advanced by Hodes to the media company; (2) a client is presented a bill that includes Hodes’s fee or (3) she initially secures the client’s commitment.” The Second Circuit stated that “[u]nder any of these scenarios, the commissions would have been ‘earned’ prior to the deductions.” Rather than deciding this issue, however, the Second Circuit certified this question to the New York Court of Appeals because “neither the Court of Appeals nor the state appellate courts have definitively addressed the applicability of this common law rule to Section 193 and the definition of ‘wages’ in Article 6.”

Based on the foregoing, the Second Circuit certified the following questions to the New York Court of Appeals: (i) “Whether an ‘executive’ is considered an ‘employee’ for purposes of New York Labor Law Article 6, Section 193 and thereby subject to the protections of that provision?” and (ii) “In the absence of a governing written agreement, when are commissions ‘earned’ and therefore considered ‘wages’ under Section 191 and 193 [of the New York Labor Law], thereby rendering most subsequent deductions unlawful?’