In Pachter v. Bernard Hodes Group, Inc., the New York Court of Appeals, the highest court in New York, addressed whether executives are entitled to protections afforded to “employees” under Article 6 of the New York Labor Law and when, in the absence of a written agreement, commissions are earned and therefore considered wages under the Labor Law.

The case arose when Pachter sued her former employer, Bernard Hodes Group, Inc., alleging that the deductions from her commissions were unlawful under Section 193 of the Labor Law. Pachter’s commissions were subject to deductions for costs associated with nonpayment or late payment by clients, costs associated with Pachter’s personal assistant and miscellaneous business costs.

In holding that executives are employees within the meaning of the Labor Law, the Court of Appeals put to rest a disagreement among New York state courts and federal courts in New York as to whether executives were employees under the Labor Law. The

Court of Appeals noted that Labor Law Section 190 has a broad definition of employee. The Court also pointed out that several subcategories under the Labor Law specifically exclude executives from receiving certain benefits for employees, reasoning that if executives were not employees in the first place, it would have been superfluous for the legislature to exclude them in these subcategories.

Next, the Court of Appeals addressed when a commission becomes “earned” in the absence of a written agreement. Labor Law Section 193 prohibits employers from making deductions from employee wages unless permitted by law or authorized in writing by the employee for certain employee benefits, charitable donations, payments or union dues. Commissions are considered wages, under Section 190(1). Section 193, however, does not prohibit employers from making deductions before employees “earn” their commissions. Therefore, the Court had to determine when commissions are earned and thus become wages.

The Court determined that commissions become earned when the employee produces a ready, willing and able buyer. This means that an employee’s commissions are typically earned when his or her efforts result in a client’s commitment to buy goods or services. The Court expressed that in the absence of a written agreement, evidence of the 11 year course of dealings between Bernard Hodes and Pachter could establish an implied agreement between the parties under which the computation of commissions could depend on making adjustments based on certain factors, such as nonpayment by customers, cost of a personal assistant and work related expenses. Consequently, the Court of Appeals held that employers and employees are not prohibited by Section 193 from entering into agreements to structure compensation formulas so that commissions are earned only after specific deductions are taken from gross sales. Only in the absence of an agreement, whether express or implied, should courts apply the ready, willing and able buyer test to determine when commissions become earned.

The result of the Pachter decision is twofold. The ruling that executives are “employees” under the Labor Law affords executives greater protections against deductions from wages. On the other hand, employers still can lawfully agree to commission formulas with their commissioned employees providing for adjustments or deductions for business related expenses. In light of this decision, employers should be pleased that they can create their own commission computation formulas without violating Section 193, but, at the same time, employers should be wary that their wage-deduction practices may create liability with regard to executive employees. Employers are well-advised to consult employment counsel before making deductions from executives’ commissions or other compensation.