Is An "Executive" An "Employee"?

That’s a good question. So good, in fact, that the United States Court of Appeals for the Second Circuit recently certified that question to the New York Court of Appeals for resolution in a case entitled: Pachter v. Bernard Hodes Group, Inc. To my mind, New York law broadly construes the term “employee” and fails to make any distinction between executives and non-executives for purposes of determining “employee” status. While some New York courts agree, others do not. Given the apparent sharp split between the judiciary, it’s now up to the State’s highest court to opine on the subject.

In Pachter, the Plaintiff was a Vice President of the Defendant, a recruitment, marketing and staffing services company; the Plaintiff worked on commission which was subject to various deductions by the Defendant. Those deductions included, but were not limited to finance charges if client payments were not received promptly, the payment of salary and benefits for Plaintiff’s assistant, bad debt, client refusals to pay their bills due to errors, and miscellaneous costs. After Plaintiff left the company, she sued for, inter alia, reimbursement of the deductions made from her commissions. The Plaintiff moved for summary judgment, arguing that the deductions were unlawful under New York Labor Law Sec. 193 because the statute permits an employer to deduct only limited types of items from employee wages such as health insurance premiums, pension benefits, union dues and similar payments for the employee’s benefit. The Defendant also moved for summary judgment on the grounds that the Plaintiff, as an "executive", was excluded from the statutory definition of "employee," and, even if she were not so excluded, the subject commissions were not “earned” under the Labor Law until after the deductions in question were made.

The lower court granted the Plaintiff’s Motion and denied the Defendant’s application. The Defendant appealed to the Second Circuit which certified two questions to the New York Court of Appeals: (i) whether an executive is an employee under Labor Law Sec. 193 and thus subject to the protections of the statute?; and (ii) when, in the absence of a governing written agreement, are commissions "earned" and therefore considered "wages" under Labor Law Secs. 191 and 193, thereby rendering most subsequent deductions unlawful?

As to the first certified question, I respectfully conclude, based on my reading of the statute and related provisions of the Labor Law, that an executive qualifies as an employee for purposes of Section 193 inasmuch as Labor Law Sec. 190(2) defines the term “employee” as “any person employed for hire by an employer in any employment.” That’s a pretty broad definition, n’est ce pas? Despite this apparent “slam dunk” (I know, there’s no such thing in law, life or love), the Second Circuit, seemingly troubled by the split of decisional authority, refused to pass on the issue and punted instead.

As to the second certified question, the Second Circuit, noting that no written agreement existed between the parties, opined that their relationship was akin to a conventional, common law brokerage relationship where the commission is earned upon bringing a client to the table, among other things. Since the New York courts provided absolutely no guidance on this issue, the Second Circuit chose to certify the question

IMHO, the Second Circuit was correct in the latter instance, but wrong as to the former. The issue concerning commissions is certainly one of first impression and was properly referred to the State’s highest court. However, the Second Circuit could have resolved the executive/employee issue by looking to the plain language of the statute. Indeed, in dicta, the court stated that its consideration of the relevant statutory authority suggested that the definition of an employee under Labor Law Sec. 190(2) was to be applied broadly, even to executives. So, what’s the problem? Why the need to waste time, expense and judicial resources on that score? Beats me. But, hey, that’s the system hard at work as it continues to spin tax dollars and logic in a never-ending circle of confusion.