A recent New York Court of Appeals decision, together with the October 2007 amendments to New York State Labor Law’s commissioned salesperson provision, underscores the importance of memorializing the terms of a commissioned employee’s employment and compensation in writing.

The case, Pachter v. Bernard Hodes Group, Inc., arose prior to the 2007 amendments and concerned Elaine Pachter’s contention that Hodes improperly deducted business costs from her percentage of client billings when calculating her commission income. Pachter was a Hodes vice president in charge of arranging media advertisements for clients ove a period of more than 11 years. Pachter acknowledged she was aware of the deductions and did not dispute them while a Hodes employee. Based on these facts, the court found an implied contract between Hodes and Pachter under which her commission income depended on business expense deductions. 

The Pachter court was called on to answer two certified questions from the US Court of Appeals for the Second Circuit regarding the scope of New York State Labor Law’s article 6 protections. In response to the first, the court held that “executives are employees for purposes of Labor Law article 6, except where expressly excluded.”  Under Section 190, which lays out the definitions for the amended Section 191, “Commissioned salespersons” include “any employee whose principal activity is the selling of any goods, wares, merchandise, services, real estate, securities, insurance or any article or thing and whose earnings are based in whole or in part on commissions,” but does not include any employee “whose principal activity is of a supervisory, managerial, executive or administrative nature.” N.Y. Labor Law § 190(6). Because the definition centers on an employee’s “principal activity,” employers need to be aware that they must look beyond an employee’s title, focusing instead on the employee’s actual duties when assessing the section’s applicability. 

Addressing the second question, the court ruled that when a commission is earned and becomes a wage “is regulated by 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 services.” 

Under common law an employee earns a commission when she produces a client “ready and willing” to enter into a contract. According to the court, however, New York State Labor Law does not prohibit employers and employees from agreeing to other, different compensation terms. Allowed then is a compensation scheme by which, as in Pachter’s case, the commission is deemed earned only after deducting specified work-related expenses. In cases where no agreement, express or implied, exists, the court will continue to follow the common law rule – a commission is earned when an employee delivers a “ready, willing and able buyer.”

This decision will affect New York’s commission-based workers, allowing an employer to structure its compensation system to subtract its business expenses when determining an employee’s commission-based wages. More broadly, Pachter illustrates the importance of maintaining written commission agreements with all commissioned employees in keeping with last year’s amendments to the state’s labor law. Although the decision alone might lead an employer to conclude that an implied contract is sufficient, together with the 2007 amendments to New York State Labor Law, Pachter is indicative of the need for written employment and compensation agreements between employers and all commissioned employees. 

The amendments to Section 191(c) of the New York State Labor Law require employers to record the employment terms of salespeople working on commission in a signed writing.  Previously, no writing was required. The law, which went into effect on October 16, 2007, was an answer to the Department of Labor’s difficulty in fairly mediating recurring compensation disputes in cases involving commissioned employees.

Under the amended 191(c), the agreement must include detailed information on the employee’s compensation structure, including a description of how wages, salary, drawing account, commissions and all monies earned will be calculated. Wages are “the earnings of an employee for labor or services rendered, regardless of whether the amount of earnings is determined on a time, piece, commission or other basis.” 31 N.Y. Labor Law §190.  Commissions are defined as “compensation accruing to a sales representative…the rate of which is expressed as a percentage of the dollar amount of wholesale orders or sales,” and are considered earned “according to the terms of an applicable contract or, when there is no applicable contractual provision, a commission due for merchandise which has actually been delivered to, accepted by, and paid for by the customer, notwithstanding that the sales representative's services may have terminated.” Id. at 191-a.  The frequency of the recoverable draw must be stated, where applicable, along with the procedure for payment in the event that either party terminates the employment relationship. 

The signed agreement must be kept on file for at least three years (though the statute of limitations on breach of contract claims is six years). An employer’s failure to produce the agreement when asked for it by the Labor Commissioner or a judge in court will set off a presumption that the agreed terms of employment are those asserted by the employee. A finding that the employer failed to award the agreed-upon compensation may result in civil liability for wages, penalties and attorneys’ fees, along with potential criminal liability.

In contrast to New York, both California and the District of Columbia lack a requirement that employers enter into written agreements with commissioned employees. Even so, employers should, as a matter of course, have written agreements with their commissioned employees detailing all aspects of the employment relationship. Such agreements limit the likelihood of future disputes, like that in Pachter, and provide evidentiary support should such disputes arise. 

Darrell S. Gay
darrell.gay@arentfox.com
212.457.5465