As discussed in our December 2007 newsletter, the United States Court of Appeals for the Second Circuit, in Pachter v. Bernard Hodes Group Inc. (October 12, 2007), 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 New York 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.”1 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?’” On June 10, 2008, the New York Court of Appeals responded to the Second Circuit by holding that “an ‘executive’ falls within the ambit of the protections afforded to ‘employees’ under sections 190 and 193 of the [New York] Labor Law, and that the determination of when a commission is earned is governed by the parties’ express or implied agreement.”

From April 1992 to December 2003, plaintiffappellee 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 one 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 bill); (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 workrelated 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 attorney’s fees as mandated by the Labor Law. Hodes appealed to the Second Circuit, and the Second Circuit certified the above two questions to the New York Court of Appeals.

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

With respect to the first question, the New York Court of Appeals held that “[i]t is evident from the text and structure of Article 6 of the Labor Law that executives are employees within the meaning of § 190(2)” (which defines an “employee” as “any person employed for hire by an employer in any employment”). The Court of Appeals stated that, “[a]lthough executives are removed from the definitions of certain subcategories of employees in Labor Law § 190(5), (6) and (7), those provisions are not intended to limit the scope of who qualifies as an ‘employee’ under subdivision (2).” The Court of Appeals further noted that other subsections of Section 190 explicitly exempt executives and reasoned that those exemptions would be “wholly superfluous” if executives did not fall into the general definition of “employee” in § 190(2).

The Court of Appeals also addressed the split of authority as to whether executives are covered by Article 6 of the Labor Law that developed as a result of the language used in its decision in Gottlieb v. Kenneth D. Laub & Co., 82 N.Y.2d 457 (1993). In Gottlieb, the Court of Appeals stated, in dicta, that “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 renumeration on behalf of employees who in all other respects are excluded from wage enforcement protection under recodified Article 6 of the Labor Law.” The Court of Appeals stated that “[t]his observation was not intended to signal that executives are outside the reach of Article 6.” Rather, the Court underscored that its decision in Gottlieb was “limited to determining [that an] employee [serving in an executive, managerial or administrative capacity] who asserted a common-law contract cause of action, but did not allege a violation of any substantive provision of Article 6, could [not] collect attorney’s fees under Labor Law § 198 (1-a).” The Court of Appeals therefore answered the first question in the affirmative, stating that “executives are employees for the purposes of Labor Law [A]rticle 6, except where expressly excluded.” As such, any wages paid to Pachter would be subject to the limitations on wage deductions contained in Section 193 of the Labor Law.

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

With respect to the second question, the Court of Appeals noted that the legality of the deductions for business costs described above “depends on when Pachter’s commission was ‘earned’ and became a ‘wage’ that was subject to the restrictions of Section 193.” The Court of Appeals stated that Article 6 does not define when commissions are to be considered “earned” and therefore the Court must look to the common law.2

Under the common law, commissions for the sale of real estate are earned once a broker produces a person “ready and willing to enter into a contract upon his employer’s terms.” (Internal quotations omitted.) The Court of Appeals assumed that this same rule would apply to the sale of goods and services, but stated that “it is well-settled that parties to a transaction are free to depart from the common law by entering a different arrangement” and that “parties ‘are free to add whatever conditions they may wish to their agreement.’” The Court of Appeals noted further that “[the parties] may provide that the computation of a commission will include certain downward adjustments from gross sales, billings or receivables,” and that, “[i]n that event, the commission will not be deemed ‘earned’ or vested until computation of the agreed-upon formula.”

With respect to Pachter, the Court of Appeals noted that having the commission earned when Pachter’s efforts resulted in a client’s commitment to buy advertising was most consistent with the common-law “ready, willing and able buyer” rule. Notwithstanding the lack of a written contract, the Court of Appeals held that “the parties’ extensive course of dealings for more than 11 years and the written monthly compensation statements issued by Hodes and accepted by Pachter ... provide ample support ... [that] there was an implied contract under which the final computation of the commissions earned by Pachter depended on first making adjustments [for certain work-related expenses from her percentage of gross billings].” The Court of Appeals noted that “Pachter reaped substantial benefit from the formula, earning a higher annual income than employees on fixed salaries performing similar duties.” The Court of Appeals therefore answered the second question by holding that, “in the absence of a governing written agreement, when a commission is ‘earned’ and becomes a ‘wage’ for purposes of Labor [A]rticle 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 employees’ production of a ready, willing and able purchaser of the services.” Since the parties had impliedly agreed that commissions would be calculated only after the above-described deductions from gross monthly billings, the commissions had not become earned wages prior to the making of the deductions and therefore Section 193 of the Labor Law did not prohibit these deductions.