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Discretionary bonuses frequently used as incentives by investment banking and law firms are not wages subject to the protection of state labor law, the New York Court of Appeals held Tuesday in a first-impression ruling. The 6-0 decision in Truelove v. Northeast Capital & Advisory Inc., 99, marks the court’s first commentary on the popular compensation packages that combine salary and bonuses. It said that a discretionary bonus based even partially on the performance of a firm is not a wage as defined under state law. The ruling arises out of an appeal brought by William B. Truelove Jr., a financial analyst hired by Northeast Capital & Advisory Inc. of Albany in June 1996. Truelove selected a compensation plan that provided him with a $40,000 annual salary and eligibility to participate in a bonus and profit sharing pool. The bonus would reflect both Truelove’s individual performance as well as the firm’s. At the end of 1997, Northeast Capital’s pool contained $240,000, based on annual firm revenues of $1.6 million. Truelove was allocated $160,000 of that pool, payable in four installments. Shortly after receiving the first $40,000 installment, Truelove left the firm. When Northeast Capital refused to make further payments, Truelove sued under labor law, alleging that the bonus constituted wages within the confines of Article 6 of the Labor Law. Truelove argued that linking the bonus to his continued employment with the firm violated labor law and public policy because it resulted in the forfeiture of earned wages. Three courts have now disagreed with that argument. Supreme Court Justice Bernard J. Malone Jr. of Albany dismissed the complaint in a ruling upheld unanimously by the Appellate Division, 3rd Department in January. On Tuesday the Court of Appeals affirmed. Judge Howard A. Levine, writing for the court, observed that New York has long provided statutory protection for workers’ wages. However, he also said that the legislature has narrowly defined wages as “the earnings of an employee for labor and services rendered,” a definition that seemingly excludes profit-sharing arrangements that “are both contingent and dependent, at least in part, on the financial success of the business enterprise.” Here, Levine said, the fact that the bonus pool was solely dependent on the success of Northeast Capital, and that Truelove’s share was entirely discretionary, “take plaintiff’s bonus payments out of the statutory definition of wages.” The court said its holding in Truelove is consistent with its decision in People v. Vetri, 304 NY 401 (1955), when the judges found that vacation pay did not constitute wages. It noted that, despite two legislative actions that redefined “wages,” the narrow construction of Vetri remains intact. Mark T. Walsh of Gleason, Dunn, Walsh & O’Shea in Albany, which represented Northeast Capital, said Tuesday’s decision is consistent with many appellate division and U.S. Court of Appeals rulings. Truelove was represented by Phillip G. Steck of Cooper, Erving, Savage, Nolan & Heller of Albany. “I would certainly have to advise employees that these type of forfeiture arrangements can be legal if they involve a share of the profits,” Steck said. “However, on the other hand, the law still seems to be that if it is a commission based on sales or derived from sales, the employee is protected. The key is whether the compensation comes from the overall income of the firm or whether it comes from individual activity of the employee.” Related decision: William B. Truelove, Jr. v. Northeast Capital & Advisory Inc. (available on law.com/new york)

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