December 31, 2007
Employers who pay their employees based on commissions should be aware of a case that is now pending before New York's highest court that will decide whether employers can legally deduct certain items from their employees' commissions. Like virtually all states, New York has a wage payment statute, which makes it illegal for employers to take any deductions from an employee's wages. These statutes contain limited exceptions for deductions authorized by employees for insurance premiums, benefit plan payments, charitable contributions, and union dues. Employers who violate these statutes and are sued by current or former employees can be liable for the amounts of the illegal deductions (plus interest), statutory fines, and the employee's attorneys' fees.
In the case that is pending in New York, the plaintiff sued her former employer for what she claimed were improper deductions taken from her commission checks over the years that she worked there. She was an account representative whose title was Vice President and Management Supervisor. Her responsibilities included preparing, placing, and servicing ads in various media outlets for her employer's clients. For many years, her compensation exceeded $100,000 and her salary was paid entirely in commissions based on a percentage of her monthly billings. Specifically, her employer would advance the money to pay the media companies for advertising and then seek reimbursement from its clients.
The commissions were calculated based on client billings for amounts previously advanced by the employer and on a service fee charged by the employer to clients for the employee's services. The employer took several deductions from the employee's monthly commission checks relating to business expenses that the employer attributed to her, such as finance charges, costs attributable to her assistant, late fees, uncollectible advances, bad debts, and her work-related travel and entertainment expenses, which her employer had advanced and she was required to repay. All of these deductions were identified on commission statements she received when she was paid. The deductions totaled about $154,000.
As discussed above, New York's wage payment statute generally prohibited these kinds of deductions but did so with respect to "wages" paid to "employees." Another provision of the statute, however, which requires that commissioned sales people be paid no less frequently than monthly, expressly exempts employees working in an executive capacity from this requirement. The employer that was sued argued that the prohibition against deductions did not apply for two reasons. First, the employee was an executive, and the prohibition against deductions did not apply to executives based on the exemption for executives appearing in the separate section of the statute governing how frequently employees have to be paid. Second, the commissions were not "wages" because they were not earned until after the deductions were taken.
Unfortunately, New York's highest court had never decided these two issues, so the federal appeals court that was hearing this case surveyed New York federal and state decisions from lower courts and found that these court decisions were all over the map and had reached inconsistent results that favored both employees and employers. Consequently, this past October, the New York federal appeals court officially requested that New York's highest court answer these two questions. The first question submitted to New York's highest court was whether the statutory prohibition against making deductions applies to all employees regardless of their position, or whether it does not apply to executives.
The second question submitted to New York's highest court was whether the statutory prohibition against deductions from "wages" applies to commissions. The law in New York and most other states is that a commission is considered wages once it is "earned." Thus, the answer to this question depends on whether a commission was "earned" before or after the 42 Comercial Factor | WINTER 2008 deductions were made. The law also recognizes that a written agreement between an employer and an employee can provide for when the commission is earned. But, in the absence of such an agreement, the law generally provides that the commission is earned "upon sale." In the New York case discussed above, the employee's commission could have been earned when: (a) payment was advanced by the employer to one of the media companies, (b) the employer's client was presented with a bill that included the employer's fee, or (c) the employee initially obtained a client's commitment. In any of these situations, the commission would have been earned before the deductions were taken, and thus they would have been subject to the statutory prohibitions against deductions. But because this "upon sale" rule has usually been applied in traditional broker relationships, the New York federal appeals court also asked New York's highest court to decide under what circumstances commissions are considered "earned" and subject to the prohibition against deductions.
In light of the above, employers who pay their employees on commission should consult with their legal counsel to make sure that current or planned policies to make deductions from their employees' commissions are in compliance with their states' wage payment laws. First, employers should satisfy themselves that their states' prohibitions against deductions apply to commissions. As discussed above, commission policies and agreements can be drafted to clarify that the commissions are not "earned" until after the deductions are taken, in which case the deductions will likely be legally taken. Second, employers should satisfy themselves that deductions taken from commissions paid to executives are subject to the prohibitions in their states' wage payment laws. Thus, like most employment law challenges, the risks associated with commission deductions can be mitigated with proper planning in conjunction with an experienced employment lawyer.
Jeffrey M. Eilender and David J. Kata are members of Schlam Stone & Dolan.
[This article is reprinted with permission from the Winter 2008 issue of Commercial Factor, a publication of the International Factoring Association. Copyright © 2008 International Factoring Association. All rights reserved. Further duplication without permission is prohibited.]