Small Business: Who Knew Executives Are Employees? Current Legal Issues Involving N.Y. Labor Law
January 28, 2009
By Philip I. Frankel, Small-Biz Focus, January/February 2009
This article first appeared in the January/February 2009 issue of Small-Biz Focus produced by Support Services Alliance, Inc. (SSA).
The recent Court of Appeals decision in Pachter v. Bernard Hodes Group, Inc., 10 N.Y.3d 609 (2008), clears up any ambiguity with respect to whether executives are "employees" under N.Y. Labor Law Section 193. In addition, this decision dictates that courts will rely on the language of commission-based compensation plans, together with the parties' course of dealing, in determining exactly when a commission is actually "earned." This is significant because in New York, wage deduction laws are inapplicable in calculating payment to commissioned employees.
Elaine Pachter worked as a Vice-President for Hodes, a media and communications recruitment agency. She was paid on a commission basis, but the Company deducted expenses from her commission. When she quit, she filed suit alleging that business costs were improperly deducted from her earnings in violation of New York State Labor Laws.
Specifically, N.Y. Labor Law Section 193 prohibits employers from making any deductions from employees' wages except for:
- employee-authorized deductions for insurance premiums, pension or health and welfare benefits;
- contributions to charitable organizations
- payments for United States bonds; and
- payments for union dues and similar payments for the benefit of the employee.
Pachter alleged that her compensation package violated Section 193 because it was based on a formula whereby finance charges, late fees, uncollectible bills to clients and the cost of her assistant were subtracted from her percentage of the sales she generated.
Hodes argued that Section 193 was inapplicable to Pachter because she was an "executive" and the labor laws only applied to "employees." Furthermore, Hodes claimed that even if the Court determined that Pachter was an "employee", the deductions were not taken out of her commission, but rather, were simply used to "calculate" her commissions.
Definition of N.Y. Labor Law
The Court of Appeals first noted that N.Y. Labor Law defines an "employee" as "any person employed for hire by an employer in any employment." Thus, since "executives" are not expressly excluded from this definition, they are entitled to the protections afforded by the statute. This interpretation shows the expansiveness of the Labor Laws.
Open Issue Involving Commissions
More importantly, the Court clarified the open issue involving commissions. It held that nothing in New York law prohibits a compensation structure whereby an employee's commission is deemed "earned" only after certain deductions are made. The Court held that the point in time at which a commission is "earned" and becomes a "wage, " is regulated "by the parties' express or implied agreement." If no agreement exists, then it is when an employee produces a ready, willing and able customer. Here, the parties' extensive negotiations over ten years, along with the compensation statements showing the deductions provided to Pachter each month, was sufficient evidence for the Court to determine that the parties had an implied contract pursuant to which her commissions were not earned until her employer made adjustments for work-related expenses.
If nothing else, the Pachter decision reminds all employers that they must be cognizant of the fact that the Section 193 limitations of deductions applies to all employees, including executives. Yet, the decision also provides employers with an unambiguous roadmap on how to structure commission-based compensation plans in order to avoid claims under Section 193 of the Labor Law.