Employment Law: Executive Compensation: An ongoing legal battle revolving around whether an employer was permitted, under New York law, to make deductions to commission payments has been finally concluded. The case of Pachter v. Bernard Hodes Group, Inc., has been litigated in the courts for several years, reaching the Second Circuit Court of Appeals twice.
The case is derived from a lawsuit brought by Elaine Pachter, an executive who was employed by the Bernard Hodes Group (“Hodes”), a recruiting, marketing and staffing company. Pachter’s compensation was derived from commissions based upon her monthly billings. Over the years she had been paid based on a calculation of those billings with a deduction being made for finance charges and costs attributable to her assistant, late fees, uncollectible advances and bad debts. The Court noted that during her tenure with Hodes, Ms. Pachter never objected to these deductions being made.
Nevertheless, once she left the company, Ms. Pachter sued claiming that the deductions made from her commissions were violative of New York Labor Law section 193. That section specifically prohibits an employer from making deductions against employee compensation unless those deductions are generally (a) in accord with the law; (b) made with the express, written authorization of the employee for her benefit (i.e., health insurance premiums). Hodes responded that, as an executive, Ms. Pachter was not an “employee” under the purview of the statute.
In its first review of the case, the Second Circuit certified two questions to the New York Court of Appeals: (1) is an “executive” an “employee” under Section 193 of the Labor Law; and (2) when is a commission “earned”? The Second Circuit in the instant decision determined that the Court of Appeals decision resolved the case. The Court of Appeals determined that an executive is an employee under this provision, unless specifically exempted. This executives can also avail themselves of the protections of the provision.
However, the Court also determined that Ms. Pachter was nevertheless not entitled to recoup monies for the deductions made based on the implied agreement that existed between Hodes and her. The Court of Appeals determined that “a commission is ‘earned’ and becomes a ‘wage’ for purposes of Labor Law article 6 [based on] 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 the services.” The Court determined that by agreeing to the compensation formula that was utilized over the years, at the very least an implied agreement existed between them. Therefore, in this instance, the parties had “agreed” that the commissions were earned only after specific deductions were made.
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