Many Lessons Learned: NY Court of Appeals Rules "Executives" Can Be "Employees"
A recent decision by New York’s highest court offers many practical lessons while ruling that “Executives” can be considered “Employees” for the purpose of determining whether certain deductions from wages are permissible under New York’s Labor Law.
The case, Pachter v. Bernard Hodes Group, Inc., 10 N.Y.3d 609, 861 N.Y.S.2d 246 (2008) was brought to our attention by the New York Law Digest, edited by David D. Siegel, No. 586 (October 2008) of the New York State Bar Association,
At a minimum, we draw the following lessons from the facts and the rulings of the Court:
- Regardless of a long-standing relationship or the advantageous nature of the relationship, some employees will sue;
- Employee classifications subject to legal exemptions, such as “Executive” in this case, can be successfully challenged;
- The Court can “giveth” with one hand, and “taketh away” with the other;
- A written contract might prevent litigation or reduce the trouble and expense.
In brief, the facts are that an employee for a marketing organization chose to be compensated on a commission basis rather than straight salary. The Court noted that the arrangement, going on for over a decade, allowed the employee to earn $100,000 to $200,000 per year instead of the $40,000 to $75,000 available on straight salary. Certainly, that can be considered an advantage to the employee.
Nonetheless, when the employee left, the employee sued claiming that certain deductions taken from the commissions, although the employee was aware of them at all times, are not permitted under New York’s Labor Law. The company countered that the employee was an “Executive” as defined under the Labor Law and exempt from the prohibition against the deductions.
The Court of Appeals had two somewhat technical legal questions before it: (a) is an executive entitled to the protections extended to employees in Article 6 of the Labor Law; and (b) in the absence of a written agreement, when is a commission “earned” and, therefore, becomes “wages” subject to the Labor Law’s prohibition against the deductions.
On the first question, from the perspective of the employee, the Court “giveth.” The Court noted that “Executives” are excluded form some sections of the Labor Law but not the one concerning the prohibition against deductions. Thus, the Court ruled that Executives” are included as “Employees” except where expressly excluded. The employer’s reliance on the “Executive” classification was successfully challenged.
On the second question, from the perspective of the employee, the Court “taketh.” While the default rule is the common law rule that commissions are “earned” as soon as a person ready and willing to enter into a contract is produced, that rule can be modified by a contract between employer and employee. In this case, there was no written contract but there was a “course of dealing,” for over a decade. The Court ruled that the employee had, in effect, agreed that commissions were “earned” only after the deductions were taken out.
The employer might feel vindicated. However, consider the procedural context. This was a federal case decided by a District Court. Then, it was appealed to the federal Court of Appeals. That Court, as it is permitted to do, asked for guidance on New York law from the New York Court of Appeals through the procedural device of submitting “certified questions.” For our nonlawyer readers: the federal courts can rule on state law but when, in their judgment, precedents are unclear, they can refer questions of law to the highest State Court for rulings.
That’s what happened in this case and that’s a lot of expensive litigation. Especially so if you consider that the legal questions arose because of the “absence of a written contract.” Had there been a written contract, litigation might have been avoided altogether but, even if not, it might have amounted to a simple contract matter with a lot less trouble and expense.
