Authored by Caitlin Ladd
Employers with commissioned employees will be pleased with a new decision finding that Morgan Stanley Smith Barney’s approach to commission calculations was not an improper deduction from wages under the New York Labor Law.
MSSB’s compensation structure allows its Financial Advisors to select from a variety of formulas, all of which provide for fixed business development allowances for events like seminars and client dinners. When calculating the FAs’ commissions, the company first considers how much the FA received in such allowances. In a multidistrict overtime litigation pending in the District of New Jersey, the plaintiffs argued that MSSB’s formula violates NYLL § 193 because, they said, the company required them to spend those amounts, thereby reducing the value of their commissions.
Judge William Martini did not buy the argument. Relying on the NY Court of Appeals 2008 decision in Pachter v. Bernard Hodes Group, he found that the commission plan did not result in impermissible deductions from “wages” because the compensation policies provided that payments would be computed after deductions were made for their monthly advances. He further reasoned that, by continuing to work, the FAs signified their agreement with these policies, in particular their treatment of business expenses and allowances. According to Judge Martini, if some FAs chose to exceed their allowances to build their client base, as they were permitted to do, “it is hard to see how they did so involuntarily.”
With this decision, MSSB has effectively trimmed all impermissible wage deduction claims from the cases, leaving only claims under federal and state law for overtime violations. More to come on that front as the cases proceed.
In the meantime, employers with commission-based compensation plans can take heart that federal courts will apply Pachter and reject NYLL deduction claims where the payment plans provide that commissions are not “earned” or “vested” until all possible allowances have been computed. Another important lesson from this decision is that compensation plans should specify the allowances provided for business development expenses and make clear that expenses incurred beyond those amounts are voluntary and not subject to reimbursement.