An "Executive" Is An "Employee" Under New York Labor Law

Last week, the New York Court of Appeals held that executives are “employees” within the meaning of the State’s Labor Law. Accordingly, employers must comply with the provisions of New York Labor Law §193 with respect to the types of allowed deductions made from the wages of executive employees. The case is Pachter v. Bernard Hodes Group, and can be found here.

In Pachter, the Plaintiff was employed as a corporate Vice President who had elected to be compensated on a commission basis. The company specialized in providing recruitment, marketing and staffing services for other businesses. Typically, it would advance monies to media companies on behalf of its clients; it would later be reimbursed for same and would receive a fee for the Plaintiff’s services in arranging for the media advertisements.

In arriving at Plaintiff's commission income, the company paid the Plaintiff a percentage of the amount billed less certain charges. Gross client receipts were reduced by business costs, including finance charges for late payments, losses attributable to errors in placing advertisements, uncollected debts, and Plaintiff’s travel and entertainment expenses. Also, one-half of the salary paid for Plaintiff’s assistant was deducted from her percentage of billings. Accordingly, Plaintiff’s “net” commission was less than it would have been otherwise, but for those deductions.

After separating from the company, the Plaintiff commenced a federal court action alleging, among other things, that New York Labor Law §193 prohibited the company from deducting business expenses from her percentage of client billings in arriving at the net commission. Labor Law §193 prevents employers from making certain deductions from the wages of an “employee" which are not for the employee’s benefit. The statute limits the permitted deductions to “insurance premiums, pension or health and welfare benefits, contributions to charitable organizations, payments for United States bonds, payments for dues or assessments to a labor organization, and similar payments for the benefit of the employee.” The company defended on the ground that since the Plaintiff was an “executive” and not an “employee” as defined by statute, the deductions were permissible.

The Plaintiff prevailed at the trial level and the company appealed to the United States Court of Appeals for the Second Circuit. The New York Court of Appeals, in resolving one of two certified questions from the Second Circuit, held that the Plaintiff was an “employee” and disallowed the deductions. In so doing, the Court held that it was evident from the text and structure of Labor Law Article 6 that an executive is "within the ambit of the general definition of 'employee.'" The Court further held (in resolving the second certified question) that parties may agree as to when a commission is “earned;” however, in the absence of such an agreement, the common law principle is applied that a commission is earned when a person is produced who is ready and willing to enter into a contract. The parties in this case had such an alternate arrangement which superseded the common law.

Based upon a pragmatic reading of the statute, the decision in Pachter is not surprising.