Commission Rights Clarified Under New York Law

Pachter v. Bernard Hodes Group, Inc., __ N.Y.3d __, __ N.Y.S. 2d __ (2008) — On June 10, 2008, New York’s highest court addressed the important issue of when a sales commission is “earned,” and thus not subject to deductions for expenses by an employer under the state’s wage and hour laws. The Court held that, in the absence of an agreement to the contrary, commissions are earned when a salesperson “produces a person ready and willing to enter a contract upon his [or her] employer’s terms.”  However, in a major win for employers, the Court also held that employers and employees are free to add “whatever conditions they wish” to their agreement, and “may provide that the calculation of a commission will include certain downward adjustments from gross sales, billings, or receivables.”  In such circumstances, the commission is not deemed “earned” or vested until computation of the agreed-upon formula, and thus the employer may subtract various business costs when calculating the employee’s commission. 

Moreover, the Court held that such an agreement may be “express or implied.”  Even though the parties in Pachter had no written agreement specifically permitting deductions for various expenses (including finance charges for late payments by the customer, deductions for non-payment by customers, the cost of an assistant and travel and entertainment costs), the Court held that the monthly commission statements itemizing these deductions created an implied agreement.

Employers entering into commissions agreements should also take note that in 2007, the New York Legislature amended section 191 of the Labor Law to require employers and commission salespersons to reduce to writing “the agreed terms of employment,” which must include “a description of how wages, salary, drawing account, commissions and all other monies earned and payable are calculated.”  Failure to do so gives rise to a presumption that the terms of employment that the commissioned salesperson presents to the Commissioner of Labor are the agreed terms of employment.

In light of the Pachter decision and the recent amendment to the Labor Law, employers should feel more comfortable placing conditions on when commissions are deemed “earned.”   If they want to realize the benefit of these conditions, however, they must be sure to incorporate them into a written commission agreement. 

Note: This article was published in the July 2008 issue of the New Jersey eAuthority.