Manhattan Appeals Court Rejects Senior Executive's Claim for Alleged Unpaid Incentive Compensation

Posted on August 31, 2011 by Noel Tripp

Pursuant to New York State Department of Labor guidance and New York case law, incentive compensation is not considered “wages” unless it is “earned.” See generally Truelove v. Northeast Capital & Advisory, Inc., 95 N.Y.2d 220, 225 (2000). Accordingly, disputes over an employee’s entitlement to incentive compensation in New York often turn on whether a particular bonus, or other type of incentive payment has been earned, and thus become “wages” which may not be subject to subsequent forfeiture or nonpayment. Recently, the Appellate Division’s First Department, which sits in review of the trial courts in Manhattan, rejected an executive’s claim under Article 6 of the New York Labor Law for such a payment. Cuervo v Opera Solutions LLC, 2011 NY Slip Op 6197 (1st Dep't Aug. 11, 2011).

In Cuervo, a majority of the appellate panel ruled that because the executive level employee’s offer letter had reserved to the employer the right to modify the commission schedule, the plaintiff had no claim to further commission payments based on the employer’s unilateral modification (provided, of course, that minimum wage and overtime requirements were met). The dissent focused on whether the plaintiff was an executive or administrative employee who would be categorically exempt from the payment-of-wages protections of Article 6 of the Labor Law (and whose entitlement to any further compensation would thus be limited to his remedies under contract law).

As litigation over incentive payments continues to expand, to ensure compliance with the law and avoid costly disputes over incentive compensation. all employers should regularly review their incentive compensation programs and agreements to ensure they clearly state when any such potential incentive compensation is ”earned.”

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The Price of Foregoing Written Commission Agreements

Posted on June 7, 2010 by Noel Tripp

As recently discussed here¸ a properly drafted commission agreement is essential in New York (and every state) to minimize exposure to a variety of claims, including claims for alleged unpaid commissions and improper wage deductions. In fact, in New York and other states, a written signed commission agreement is required pursuant to state law, absent which adverse inferences can be drawn.

A counter-example to the Swig Equities decision (see discussion linked above), which demonstrated the value of such an agreement, is the recent decision of the New York state trial court in Nichols v. SG Partners, Inc., 2010 NY Slip Op 30174U (N.Y. Sup. Ct. Jan. 25, 2010). Plaintiffs in Nichols were two former executive recruiters who received a base salary plus commissions. Upon termination they sued to collect alleged outstanding commissions for placements they had made. In their Complaint, they described the employer’s practice in calculating commissions to be to “more or less annually tally the placements made by plaintiffs and make additional payments based upon a percentage of the revenues from the placements.” The employer asserted that no such enforceable oral contract existed, or in the alternative was barred by various defenses to contract formation. 

Because no written contract governed the parties’ agreement regarding, inter alia, when a commission was earned, the Court refused to dismiss as a matter of law Plaintiffs’ claims that the employer breached the oral contract governing payment of commissions. Further, the Court did not dismiss the Plaintiffs’ assertion that the company’s commission payment/reconciliation process constituted an unlawful deduction from wages. Relying on precedent, the Court held that the claim under Section 193 was not duplicative of the claim for breach of contract, even though the claim sought recovery of the same commission compensation. This ruling also revived Plaintiffs’ claims under Labor Law § 198.1-a for a 25% penalty on the owed wages and attorneys’ fees.

Failure to enter into a written commission agreement creates enormous potential exposure for all businesses that employ commissioned staff.

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New York State Court Upholds Express Language of Commission Agreement

Posted on May 19, 2010 by Noel Tripp

In a recent decision, the Honorable Eileen Bransten of the Supreme Court of the State of New York, New York County, reinforced to all employers the need to utilized well-drafted commission agreements.  The court considered a claim from a real estate broker alleging that she was not paid commissions and bonuses for sales that she arranged, in violation of her agreement with the employer.   Rejecting her claim, the court pointed to express language in the parties’ agreement stating that the alleged commissions would only have been earned upon a closing and transfer for title, and stated that “parties to a brokerage agreement are free to add whatever conditions they may wish to their agreement, including a condition that the contract of sale actually be consummated before the broker is deemed to have earned his commission.” Root v Swig Equities, LLC, 2010 NY Slip Op 50843U at * 5 (N.Y. Sup. Ct. Feb. 10, 2010).   

The court then went further and, while recognizing the general principle that a “seller cannot avoid liability for a broker’s commission based on the non-occurrence of a condition precedent if the seller is responsible for its non-performance”, cited to existing case law and ruled that “[a] broker may choose to agree that even ‘if the sale falls through because of the seller’s fault, he shall be entitled to nothing.” Id.  The court then turned to the plaintiff’s claim for unpaid commissions under the New York Labor Law.   After stating that any Labor Law claim must be premised on a contractual right to recover commissions, the court rejected plaintiff’s labor law claim stating that “without a contractual right to the commissions [plaintiff] seeks to recover, she fails to state a violation of [the Labor Law].” Id. at * 7. 

This decision reinforces to employers the importance of well-drafted commission agreements with specific condition precedents for the earning of commissions.   In fact, in New York, written commission agreements are mandated and the lack of such an agreement not only limits an employer’s ability to defend a claim for unpaid commissions but also creates a presumption that the terms of employment that the commissioned salesperson has presented are the agreed terms of employment. N.Y. Labor Law § 191(1)(c).

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