New York Strengthens Wage Laws

Although the amendments concerning the wage threshold and commission salespersons, at first blush, seem easy to follow, as in most cases under the NYLL, all is not as it seems. Determining who is a commission salesperson subject to the amendment and exactly what the change in the wage threshold means for employers are no exception. Often ambiguous, and sometimes internally inconsistent, the NYLL and the case law interpreting it, sometimes raise as many questions as they answer. Just recently, for example, the Second U.S. Circuit Court of Appeals certified questions to New York's highest court, the Court of Appeals, as to the meaning of the term “employee,” as used in Article 6, Section 193. One specific question was whether an “executive” is considered an “employee” subject to Section 193's provisions governing wage deductions, since Section 190 defines “commission salesmen” and “clerical and other workers” to exclude employees working in an executive capacity. The court also certified for review the question as to when “commissions” are earned under the NYLL so as to constitute “wages” under Article 6. Pachter v. Bernard Hodes Group, Inc., No. 06-3344-cv, 2007 U.S. App. LEXIS 23921 (2nd Cir. Oct. 12, 2007).

Pachter v. Bernard Hodes Group, Inc.

In Pachter v. Bernard Hodes Group, Inc., 2008 WL 2338595 (N.Y.), 2008 N.Y. Slip Op. 05300, decided June 10, 2008, the New York Court of Appeals ruled that executives are included in the definition of “employee” under Article 6 of the New York Labor Law, and as such, Labor Law ' 193 ' the state wage law that prohibits employers from deducting the wages of employees ' applies not only to rank-and-file workers, but to executives as well. Significantly, the court also ruled when, either expressly or impliedly through a course of conduct, an executive and employer agree that a commission is earned, at that point it becomes a wage subject to the requirements of New York's wage payment law. As such, if there is an agreement that commissions are not earned (and, hence, do not constitute wages) until related expense deductions are made, such an arrangement is lawful under the Labor Law and will not contravene ' 193. Accordingly, New York's highest court has upheld wage computation arrangements that clearly subject commissions to adjustments from gross sales, billings or receivables, and/or to deductions for business-related expenses before a commission is “earned” or vested and becomes a wage. In light of this decision, employers are advised to review the compensation structures in place for all executives and commission-based employees to ensure compliance with this new interpretation of New York's Payment of Wages law.

Commission Salespersons

Commission Salesman v. Commission Salesperson

Until now, the section of the NYLL addressing the manner in which a commission salesman is to be paid, ' 191(c), did not require that the commissioned salesman have a written employment agreement setting forth the commission arrangement. The law required only that a “commission salesman” be paid in accordance with the agreed upon terms of his/her employment and at least once a month. Effective Oct. 16, 2007, however, the law has been amended to provide that the terms of employment of a “commission salesperson,” including “a description of how wages, salary, drawing account, commissions and all other monies earned and payable shall be calculated,” and paid at termination, must be memorialized in a written agreement “signed by both the employer and the commission salesperson.” N.Y. Lab. Law ' 191(c). The amendment also provides that in the absence of a written agreement, a presumption arises that the terms of employment presented by the employee in any proceeding to recover monies allegedly due to him or her “are the agreed terms of employment.” The amendment augments the preexisting requirements of ' 191(c).

Interestingly, although ' 191(1)(c) was amended to reflect the gender-neutral term “commission salesperson,” the definition section that defines the term “commission salesman,” ' 190(6), was not modified accordingly. Thus, it continues to define the term “commission salesman.” See N.Y. Lab. Law ' 190(6). It is unlikely, but far from certain, that there was an intent or significance in the failure to conform the definitional section.

Who Is a Commission Salesperson?

Under New York law, a “commission salesman” is defined as “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.” N.Y. Lab. Law ' 190(6). (Emphasis added.) However, the “term 'commission salesman' does not include an employee whose principle activity is of a supervisory, managerial, executive or administrative nature.” Id. (Emphasis added.) Thus, to be a “commission salesman”: 1) an employee's primary function must be selling; 2) part of the employee's compensation must be commission-based; and 3) the employee cannot be a supervisor or employed in a managerial, executive or administrative capacity. When ascertaining who is a commission salesperson, one must first determine if the employee's primary responsibility is sales. If it is, one must then determine if the employee receives a commission. Of course, this raises a variety of concerns as to whether bonuses and/or incentive compensation arrangements might come within the meaning of “commission.” In addition, neither the statute nor regulations define “supervisory” or “managerial.”

What Is a Commission?

Included within the definition of “wages,” a commission is “compensation accruing to a sales representative for payment ' the rate of which is expressed as a percentage of the dollar amount of wholesale orders or sales.” N.Y. Lab. Law ' 191-a. Does this mean compensation earned by an employee that is based, in part, on sales, is a commission, and thus a “wage,” that if withheld from an employee could subject an employer to a claim for “wages” under Section 198 of the NYLL in which it could be liable for attorneys' fees and liquidated damages?

Just a few years ago, in Truelove v. Northeast Capital & Advisory, Inc., 95 N.Y.2d 220, 715 N.Y.S.2d 366 (2000), the Court of Appeals answered that certain forms of compensation in New York are excluded from the statutory term “wages.” In that case, William Truelove was hired by Northeast Capital as a financial analyst. Truelove's compensation included base salary, and he was eligible for a bonus from a profit sharing pool. The “bonus, if paid, would reflect a combination of the individual's performance and Northeast Capital's performance.” In essence, the bonus would only be paid if the employer generated a certain minimum amount of revenue and only at the CEO's discretion. Truelove was, ultimately, allocated $160,000 of the bonus/profit sharing pool, but he did not agree with the allocation of some of the funds and resigned after receiving some, but not all, of the installments he was allocated. Not surprisingly, his employer refused to make payment to Truelove on the remaining installments following his separation. Naturally, Truelove sued for payment of his wages.

The issue before the NY Court of Appeals was whether these allocated remaining bonus payments were “wages” under the NYLL, to which Truelove had a vested right. New York's highest court held that “[T]he terms of defendant's bonus compensation plan did not predicate bonus payments upon plaintiff's own personal productivity nor give plaintiff a contractual right to bonus payments based upon his productivity. To the contrary, the declaration of a bonus pool was dependent solely upon his employer's overall financial success. In addition, plaintiff's share in the bonus pool was entirely discretionary and subject to the non-reviewable determination of his employer. These factors, we believe, take plaintiff's bonus payments out of the statutory definition of wages.” Id.

As it relates to commission salespersons, Truelove informs the determination as to what payments constitute commissions. In other words, if compensation or a “bonus” plan is based on multiple factors, including the subjective performance of the business, it will not be considered a commission, even if the amount payable to the employee is a percentage of his or her sales. Additionally, if the compensation is not vested, and the employer has retained discretion to set the final amount, if any, to be awarded, the compensation is not a commission but instead an “incentive compensation plan,” which the Truelove court said was outside the statutory definition of wages. Thus, if compensation paid to an employee is dependent on the employer's overall financial success and discretion, it falls within the rubric of incentive compensation, is not a commission, and the salesman is not a “commission salesman.”

Exempt Employees Are Not Commission Salespersons

Even if an employee's primary activity is sales and s/he receives all or a portion of his/her compensation in the form of commission, s/he still is not “commission salesman” if s/he is otherwise employed in a supervisory, managerial, executive or administrative nature. Gottlieb v. Kenneth D. Laub & Co., 82 N.Y.2d 457, 461, 605 N.Y.S.2d 213, 216 (1993) (“Except for manual workers, all other categories of employees entitled to statutory protection under Labor Law ' 191 [such as commission salesmen] are limited by definitional exclusions of one form or another for employees serving in an executive, managerial or administrative capacity.”).

As a result, the factor most likely to prevent an employee from being classified as a “commission salesperson” is whether or not s/he is employed in an “administrative capacity.” Again, as is the case with “commission salesman” versus “commission salesperson,” the NYLL has some potential internal inconsistency with regard to the nomenclature it uses to describe administrative employees. Thus, the definition of “commission salesman” excludes employees “whose principle activity is of a[n] ' administrative nature,” whereas the Commissioner of Labor's regulations exclude from the definition of “Employee” any individual permitted to work in an “administrative capacity.” It is assumed the same standard applies in either case.

In determining whether an individual is employed in an “administrative capacity” for purposes of exemption from overtime requirements, the New York regulations apply a single test of duties to all employees receiving a salary of at least $536.10 per week, which is not subject to reduction or impermissible deductions due to the quality or quantity of work performed. In contrast, under the Fair Labor Standards Act, this amount is $455 per week, and just as under federal law, such salary must be paid on a “salary basis.” Although beyond the scope of this article, the “salary basis test” generally requires that the employee be paid a predetermined and fixed salary, not subject to reduction because of variations in the quality or quantity of work performed. 29 C.F.R. ' 541.602(a).

The New York Labor Law regulations define administrative capacity to mean any individual:

(a) whose primary duty consists of the performance of office or non-manual field work directly related to management polices or general operations of his or her employer; and (b) who customarily and regularly exercises discretion and independent judgment; and (c) who regularly and directly assists an employer, or an employee employed in a bona fide executive or administrative capacity (e.g., employment as an administrative assistant); or who performs under only general supervision work along specialized or technical lines requiring special training, experience or knowledge; and (d) who is paid for services of a salary not less than ' $536.10 per week on and after January 1, 2007. N.Y. COMP. CODES R. & REGS. tit. 12, ' 142-2.14(c)(4)(ii) (2007).

Because the tests for exemption under the Fair Labor Standards Act (“FLSA”) and New York law practically mirror each other, opinions rendered under the FLSA can further inform the determination as to whether employees are administratively exempt under New York law.

What Has Changed and What Should an Employer Do?

Prior to the amendments for commissioned salespersons, ' 191(1)(c) provided that a commission salesperson shall be paid in accordance with the agreed terms of employment. There was no provision that those terms be in writing, nor signed by both parties, demonstrating mutual assent. In the legislature's view, “[w]age payment claims for commission salespersons [were] very difficult to investigate when there [was] no written agreement detailing the terms of employment, when and how commissions are earned, what offsets against wages are to be computed, and when commission payments cease after termination of employment. By requiring written agreements, and by creating a presumption in the employee's favor in the absence of such an agreement, the Department of Labor will be able to more effectively and efficiently investigate commission salespersons' wage complaints.” With this goal of increased enforcement in mind, the amended ' 191(1)(c) requires duly signed written agreements.

Given the consequences now associated with a failure to reduce the compensation arrangement of a commission salesperson to writing, the amendment makes it imperative that employers in New York immediately memorialize all commission pay arrangements of their commissioned salespersons in a writing signed by both parties. Such agreements should include at-will language if the employees are at-will. Furthermore, employers must now keep the agreements on file for at least three years. Failure to take any of the aforementioned actions could result in potential liability under NYLL ' 198, which provides that employees who are denied wages may recover “reasonable attorney's fees and ' liquidated damages equal to twenty-five percent of the total amount of the wages found to be due.” Keep in mind, as well, that criminal penalties under ' 198-a of the NYLL are also available against employers who violate Article 6.

Part Two of this article will discuss the other changes made in NYLL.

Elise M. Bloom, 212-969-3410, ebloom @proskauer.com, is a partner in the Labor and Employment Law Department of Proskauer Rose LLP, New York. She regularly conducts training programs on the full spectrum of employment and diversity issues. Fredric C. Leffler, 212-969-3570, flef [email protected], is Senior Counsel to the firm and represents major private and not-for-profit employers in all aspects of labor and employment law. Thomas A. McKinney, 212-969-3668, tmckinney@proskauer. com, is an associate at the firm.

Joining other states that have passed a spate of worker-friendly laws, New York has enacted several new and amended labor laws addressing a variety of workplace issues. These new laws, generally, expand employee rights by focusing on the payment of wages, time off, and enforcement. In light of recent aggressive enforcement efforts of New York's Labor Laws by both the New York State Attorney General's Office and the New York State Department of Labor (“NYSDOL”), prudent employers should consider the effect of these new enactments on their pay and leave practices and take action to ensure compliance.

Following one of the most active legislative periods in recent times, New York has enacted laws affecting the manner in which workers are paid, which will likely impact most employers. Due to raising the wage threshold for exemption from Article 6 of the New York Labor Law (“NYLL”), a larger number of employees now: 1) must be afforded the opportunity to consent before being paid through direct deposit; and 2) can sue under Section 198 of the NYLL when their employer fails to provide wages, benefits, or wage supplements in a timely fashion. In addition, the law now requires that the terms of compensation of a commissioned salesperson be memorialized in a writing signed by the employee and the employer, and that in the absence of such a writing, in any action for unpaid wages, it will be presumed that the terms of employment, including understandings as to when/how commissions are earned and paid, are as described by the commissioned salesperson. Given the repercussions associated with a failure to reduce to writing the compensation arrangement of a commission salesperson, employers need to know what types of payments constitute a “commission,” when an employee is a “Commission Salesperson” subject to Section 191(c) of the NYLL, and what to do about it. Employers also need to understand how the change in the wage threshold affects their exposure to wage lawsuits arising under the NYLL. This two-part article addresses these questions and summarizes the effect certain other changes in the NYLL will have on the workplace.

Background

Although the amendments concerning the wage threshold and commission salespersons, at first blush, seem easy to follow, as in most cases under the NYLL, all is not as it seems. Determining who is a commission salesperson subject to the amendment and exactly what the change in the wage threshold means for employers are no exception. Often ambiguous, and sometimes internally inconsistent, the NYLL and the case law interpreting it, sometimes raise as many questions as they answer. Just recently, for example, the Second U.S. Circuit Court of Appeals certified questions to New York's highest court, the Court of Appeals, as to the meaning of the term “employee,” as used in Article 6, Section 193. One specific question was whether an “executive” is considered an “employee” subject to Section 193's provisions governing wage deductions, since Section 190 defines “commission salesmen” and “clerical and other workers” to exclude employees working in an executive capacity. The court also certified for review the question as to when “commissions” are earned under the NYLL so as to constitute “wages” under Article 6. Pachter v. Bernard Hodes Group, Inc., No. 06-3344-cv, 2007 U.S. App. LEXIS 23921 (2nd Cir. Oct. 12, 2007).

Pachter v. Bernard Hodes Group, Inc.

In Pachter v. Bernard Hodes Group, Inc., 2008 WL 2338595 (N.Y.), 2008 N.Y. Slip Op. 05300, decided June 10, 2008, the New York Court of Appeals ruled that executives are included in the definition of “employee” under Article 6 of the New York Labor Law, and as such, Labor Law ' 193 ' the state wage law that prohibits employers from deducting the wages of employees ' applies not only to rank-and-file workers, but to executives as well. Significantly, the court also ruled when, either expressly or impliedly through a course of conduct, an executive and employer agree that a commission is earned, at that point it becomes a wage subject to the requirements of New York's wage payment law. As such, if there is an agreement that commissions are not earned (and, hence, do not constitute wages) until related expense deductions are made, such an arrangement is lawful under the Labor Law and will not contravene ' 193. Accordingly, New York's highest court has upheld wage computation arrangements that clearly subject commissions to adjustments from gross sales, billings or receivables, and/or to deductions for business-related expenses before a commission is “earned” or vested and becomes a wage. In light of this decision, employers are advised to review the compensation structures in place for all executives and commission-based employees to ensure compliance with this new interpretation of New York's Payment of Wages law.

Commission Salespersons

Commission Salesman v. Commission Salesperson

Until now, the section of the NYLL addressing the manner in which a commission salesman is to be paid, ' 191(c), did not require that the commissioned salesman have a written employment agreement setting forth the commission arrangement. The law required only that a “commission salesman” be paid in accordance with the agreed upon terms of his/her employment and at least once a month. Effective Oct. 16, 2007, however, the law has been amended to provide that the terms of employment of a “commission salesperson,” including “a description of how wages, salary, drawing account, commissions and all other monies earned and payable shall be calculated,” and paid at termination, must be memorialized in a written agreement “signed by both the employer and the commission salesperson.” N.Y. Lab. Law ' 191(c). The amendment also provides that in the absence of a written agreement, a presumption arises that the terms of employment presented by the employee in any proceeding to recover monies allegedly due to him or her “are the agreed terms of employment.” The amendment augments the preexisting requirements of ' 191(c).

Interestingly, although ' 191(1)(c) was amended to reflect the gender-neutral term “commission salesperson,” the definition section that defines the term “commission salesman,” ' 190(6), was not modified accordingly. Thus, it continues to define the term “commission salesman.” See N.Y. Lab. Law ' 190(6). It is unlikely, but far from certain, that there was an intent or significance in the failure to conform the definitional section.

Who Is a Commission Salesperson?

Under New York law, a “commission salesman” is defined as “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.” N.Y. Lab. Law ' 190(6). (Emphasis added.) However, the “term 'commission salesman' does not include an employee whose principle activity is of a supervisory, managerial, executive or administrative nature.” Id. (Emphasis added.) Thus, to be a “commission salesman”: 1) an employee's primary function must be selling; 2) part of the employee's compensation must be commission-based; and 3) the employee cannot be a supervisor or employed in a managerial, executive or administrative capacity. When ascertaining who is a commission salesperson, one must first determine if the employee's primary responsibility is sales. If it is, one must then determine if the employee receives a commission. Of course, this raises a variety of concerns as to whether bonuses and/or incentive compensation arrangements might come within the meaning of “commission.” In addition, neither the statute nor regulations define “supervisory” or “managerial.”

What Is a Commission?

Included within the definition of “wages,” a commission is “compensation accruing to a sales representative for payment ' the rate of which is expressed as a percentage of the dollar amount of wholesale orders or sales.” N.Y. Lab. Law ' 191-a. Does this mean compensation earned by an employee that is based, in part, on sales, is a commission, and thus a “wage,” that if withheld from an employee could subject an employer to a claim for “wages” under Section 198 of the NYLL in which it could be liable for attorneys' fees and liquidated damages?

Just a few years ago, in Truelove v. Northeast Capital & Advisory, Inc. , 95 N.Y.2d 220, 715 N.Y.S.2d 366 (2000), the Court of Appeals answered that certain forms of compensation in New York are excluded from the statutory term “wages.” In that case, William Truelove was hired by Northeast Capital as a financial analyst. Truelove's compensation included base salary, and he was eligible for a bonus from a profit sharing pool. The “bonus, if paid, would reflect a combination of the individual's performance and Northeast Capital's performance.” In essence, the bonus would only be paid if the employer generated a certain minimum amount of revenue and only at the CEO's discretion. Truelove was, ultimately, allocated $160,000 of the bonus/profit sharing pool, but he did not agree with the allocation of some of the funds and resigned after receiving some, but not all, of the installments he was allocated. Not surprisingly, his employer refused to make payment to Truelove on the remaining installments following his separation. Naturally, Truelove sued for payment of his wages.

The issue before the NY Court of Appeals was whether these allocated remaining bonus payments were “wages” under the NYLL, to which Truelove had a vested right. New York's highest court held that “[T]he terms of defendant's bonus compensation plan did not predicate bonus payments upon plaintiff's own personal productivity nor give plaintiff a contractual right to bonus payments based upon his productivity. To the contrary, the declaration of a bonus pool was dependent solely upon his employer's overall financial success. In addition, plaintiff's share in the bonus pool was entirely discretionary and subject to the non-reviewable determination of his employer. These factors, we believe, take plaintiff's bonus payments out of the statutory definition of wages.” Id.

As it relates to commission salespersons, Truelove informs the determination as to what payments constitute commissions. In other words, if compensation or a “bonus” plan is based on multiple factors, including the subjective performance of the business, it will not be considered a commission, even if the amount payable to the employee is a percentage of his or her sales. Additionally, if the compensation is not vested, and the employer has retained discretion to set the final amount, if any, to be awarded, the compensation is not a commission but instead an “incentive compensation plan,” which the Truelove court said was outside the statutory definition of wages. Thus, if compensation paid to an employee is dependent on the employer's overall financial success and discretion, it falls within the rubric of incentive compensation, is not a commission, and the salesman is not a “commission salesman.”

Exempt Employees Are Not Commission Salespersons

Even if an employee's primary activity is sales and s/he receives all or a portion of his/her compensation in the form of commission, s/he still is not “commission salesman” if s/he is otherwise employed in a supervisory, managerial, executive or administrative nature. Gottlieb v. Kenneth D. Laub & Co. , 82 N.Y.2d 457, 461, 605 N.Y.S.2d 213, 216 (1993) (“Except for manual workers, all other categories of employees entitled to statutory protection under Labor Law ' 191 [such as commission salesmen] are limited by definitional exclusions of one form or another for employees serving in an executive, managerial or administrative capacity.”).

As a result, the factor most likely to prevent an employee from being classified as a “commission salesperson” is whether or not s/he is employed in an “administrative capacity.” Again, as is the case with “commission salesman” versus “commission salesperson,” the NYLL has some potential internal inconsistency with regard to the nomenclature it uses to describe administrative employees. Thus, the definition of “commission salesman” excludes employees “whose principle activity is of a[n] ' administrative nature,” whereas the Commissioner of Labor's regulations exclude from the definition of “Employee” any individual permitted to work in an “administrative capacity.” It is assumed the same standard applies in either case.

In determining whether an individual is employed in an “administrative capacity” for purposes of exemption from overtime requirements, the New York regulations apply a single test of duties to all employees receiving a salary of at least $536.10 per week, which is not subject to reduction or impermissible deductions due to the quality or quantity of work performed. In contrast, under the Fair Labor Standards Act, this amount is $455 per week, and just as under federal law, such salary must be paid on a “salary basis.” Although beyond the scope of this article, the “salary basis test” generally requires that the employee be paid a predetermined and fixed salary, not subject to reduction because of variations in the quality or quantity of work performed. 29 C.F.R. ' 541.602(a).

The New York Labor Law regulations define administrative capacity to mean any individual:

(a) whose primary duty consists of the performance of office or non-manual field work directly related to management polices or general operations of his or her employer; and (b) who customarily and regularly exercises discretion and independent judgment; and (c) who regularly and directly assists an employer, or an employee employed in a bona fide executive or administrative capacity (e.g., employment as an administrative assistant); or who performs under only general supervision work along specialized or technical lines requiring special training, experience or knowledge; and (d) who is paid for services of a salary not less than ' $536.10 per week on and after January 1, 2007. N.Y. COMP. CODES R. & REGS. tit. 12, ' 142-2.14(c)(4)(ii) (2007).

Because the tests for exemption under the Fair Labor Standards Act (“FLSA”) and New York law practically mirror each other, opinions rendered under the FLSA can further inform the determination as to whether employees are administratively exempt under New York law.

What Has Changed and What Should an Employer Do?

Prior to the amendments for commissioned salespersons, ' 191(1)(c) provided that a commission salesperson shall be paid in accordance with the agreed terms of employment. There was no provision that those terms be in writing, nor signed by both parties, demonstrating mutual assent. In the legislature's view, “[w]age payment claims for commission salespersons [were] very difficult to investigate when there [was] no written agreement detailing the terms of employment, when and how commissions are earned, what offsets against wages are to be computed, and when commission payments cease after termination of employment. By requiring written agreements, and by creating a presumption in the employee's favor in the absence of such an agreement, the Department of Labor will be able to more effectively and efficiently investigate commission salespersons' wage complaints.” With this goal of increased enforcement in mind, the amended ' 191(1)(c) requires duly signed written agreements.

Given the consequences now associated with a failure to reduce the compensation arrangement of a commission salesperson to writing, the amendment makes it imperative that employers in New York immediately memorialize all commission pay arrangements of their commissioned salespersons in a writing signed by both parties. Such agreements should include at-will language if the employees are at-will. Furthermore, employers must now keep the agreements on file for at least three years. Failure to take any of the aforementioned actions could result in potential liability under NYLL ' 198, which provides that employees who are denied wages may recover “reasonable attorney's fees and ' liquidated damages equal to twenty-five percent of the total amount of the wages found to be due.” Keep in mind, as well, that criminal penalties under ' 198-a of the NYLL are also available against employers who violate Article 6.

Part Two of this article will discuss the other changes made in NYLL.

Elise M. Bloom, 212-969-3410, ebloom @proskauer.com, is a partner in the Labor and Employment Law Department of Proskauer Rose LLP, New York. She regularly conducts training programs on the full spectrum of employment and diversity issues. Fredric C. Leffler, 212-969-3570, flef [email protected], is Senior Counsel to the firm and represents major private and not-for-profit employers in all aspects of labor and employment law. Thomas A. McKinney, 212-969-3668, tmckinney@proskauer. com, is an associate at the firm.