Arthur J. Ciampi

Whether bonus payments to employees are “wages” under the New York Labor Law is an oft-litigated issue in employment disputes. This issue is important because, for among other reasons, New York’s public policy and statutes severely penalize employers who improperly deduct amounts from employees’ “wages.” Thus, if a law firm’s contract or nonequity partners are considered “employees,” the issue of what constitutes “wages” and what does not could be significant. The issue of what constitutes a “wage” in the law firm context has recently been addressed in Doolittle v. Nixon Peabody, 155 A.D.3d 1652 (4th Dep’t 2017).

In this month’s column, we provide some background concerning the New York Labor Law and address Doolittle.

‘Wages’

New York has “’a long standing policy against the forfeiture of earned wages,’” as in Doolittle v. Nixon Peabody, 126 A.D.3d 1519, 1520 (4th Dep’t 2015) (quoting Gruber v. J.W.E. Silk, 52 A.D.3d 339, 340 (1st Dep’t 2008)). Employers must pay employees “wages,” and are prohibited from making “any deduction from the wages” unless permitted by law, N.Y. Labor Law Section 193(1)(a)&(b); see Schutty v. Pino, 1997 WL 363812, at *3 (S.D.N.Y. 1997); Klepner v. Codata, 139 Misc. 2d 382, 385 (Sup. Ct. N.Y. County 1988), aff’d, 150 A.D.2d 994 (1st Dep’t 1989); Jordan v. Schreiber, Simmons, Macknight & Tweedy, 1994 WL 108011, at *2 (Sup. Ct. N.Y. County 1994).

In turn, wages are defined, in relevant part, as “earnings … for labor or services rendered.” In analyzing the Labor Law concerning what constituted a “wage,” the New York Court of Appeals in Truelove v. Northeast Capital Advisory, found that “in our view, the wording of the statute, in expressly linking earnings to an employee’s labor or services personally rendered, contemplates a more direct relationship between an employee’s own performance and the compensation which that employee is entitled.” Moreover, the Court of Appeals has since maintained that bonuses linked to an employee’s labor or services personally rendered did constitute “wages,” and, thus, could not be forfeited, as in Ryan v. Kellogg Partners Institutional Services, 19 N.Y.3d 1, 10 (2012).

In March of this year, the New York Court of Appeals determined that an employee’s bonus, which was based upon the plaintiff’s performance, could be “nonforfeitable wages” and affirmed the denial of a motion to dismiss. See Kolchins v. Evolution Markets, 2018 WL 1524710 (March 29, 2018). The court based its decision, in part, on the language of the employee’s agreement. The court stated that “there is language in the 2009 agreement that could be read as providing that plaintiff’s bonus was predicated on his personal productivity … .” The court further stated that “to the extent the production bonus was not discretionary and, instead, was based only on plaintiff’s performance as a manager during his final trimester of employment—a question not conclusively answered by language of the agreement—the bonus could constitute nonforfeitable ‘wages’.”

Are Law Firm Bonuses ‘Wages’?

In November 2017, the issue of whether a bonus constitutes a wage in the law firm context received an interesting treatment in the case of Doolittle v. Nixon Peabody, 155 A.D.3d 1652 (4th Dep’t 2017).

Noah Doolittle, formerly an associate at Nixon Peabody, brought an action for damages sustained when Nixon Peabody refused to pay Doolittle a bonus that Doolittle claimed he was owed. In 2005, Doolittle secured the retention of a client for Nixon Peabody through a connection he maintained with the client’s general counsel, telling the general counsel that the referral would earn him a bonus from Nixon Peabody in the form of a percentage of Nixon Peabody’s fee. In August 2008, the client received an arbitration award of $19 million. In November 2008, the client ultimately settled the case for $16 million, resulting in a fee of $5 million to Nixon Peabody.

Doolittle, who left Nixon Peabody in September 2008, was not, however, paid for his part in obtaining the $16 million settlement. As such, Doolittle brought a lawsuit against Nixon Peabody, claiming he was owed a 5 percent collection bonus.

In 2015, the Fourth Department reversed the trial court’s grant of summary judgment to Nixon Peabody that dismissed Doolittle’s claims for violation of the Labor Law and breach of contract. A jury trial then took place in which Doolittle testified Nixon Peabody’s compensation management partner informed Doolittle at several meetings throughout Doolittle’s tenure at Nixon Peabody, that, should an associate bring in a client whose case yielded more than $100,000 in fees, such associate would receive a collections bonus of 5 percent. Although Nixon Peabody’s policy regarding collections bonuses was purely oral, Doolittle’s testimony, combined with that of the compensation management partner, convinced the jury to rule in Doolittle’s favor regarding his claims for violation of Labor Law and breach of contract.

Nixon Peabody appealed on the basis that its motion for a directed verdict, in accord with CPLR 4401, as regards Doolittle’s cause of action for violation of Labor Law and breach of contract, was erroneously denied. The Fourth Department denied Nixon Peabody’s appeal insofar as it pertained to the directed verdict for the breach of contract cause of action. The court agreed, however, that the dismissal of the directed verdict motion regarding the Labor Law cause of action was error.

The court held that, while a collections bonus is protected under Labor Law Section 193(1), which states that an employer cannot deduct from an employee’s wages, the facts, as presented in the jury charge, made it so that “the jury could not have rationally concluded that the collections bonus was anything other than ‘incentive compensation’ [which is] excluded from protection under Labor Law Section 193(1).” The court reasoned that:

Labor Law Section 190(1) defines “wages” as “the earnings of an employee for labor or services rendered, regardless of whether the amount of earnings is determined on a time, piece, commission or other basis.” The Court of Appeals has explained that, “unlike in other areas where the Legislature chose to define broadly the term ‘wages’ to include every form of compensation paid to an employee, including bonuses …, the Legislature elected not to define that term in Labor Law Section 190(1) so expansively as to cover all forms of employee remuneration” (Truelove v. Northeast Capital & Advisory, 95 N.Y.2d 220, 224, 715 N.Y.S.2d 366, 738 N.E.2d 770 [2000]). Thus, “the more restrictive statutory definition of ‘wages,’ as ‘earnings … for labor or services rendered,’ excludes incentive compensation ‘based on factors falling outside the scope of the employee’s actual work’” because “the wording of the statute, in expressly linking earnings to an employee’s labor or services personally rendered, contemplates a more direct relationship between an employee’s own performance and the compensation to which that employee is entitled.” By contrast, a bonus falls within the protection of the statute, i.e., it is considered “wages” rather than “incentive compensation,” when the bonus is “‘expressly link[ed]’ to [the employee's] ‘labor or services personally rendered’,” (Ryan, 19 N.Y.3d at 16, 945 N.Y.S.2d 593, 968 N.E.2d 947; see Friedman v. Arenson Office Furnishings, 129 A.D.3d 525, 525, 12 N.Y.S.3d 34 [1st Dept.2015]).

Unlike Ryan, in this instance the court argued that the $5 million fee was generated by more than Doolittle’s personal efforts. For instance, not only did several attorneys work on the case in question, some of whom billed more hours than Doolittle, but also the ultimate settlement was obtained by a partner at Nixon Peabody who, as part of his work on the case, litigated an international arbitration and filed enforcement proceedings. As such, the 5 percent promised to associates who generate business resulting in fees over $100,000 was not in this case a bonus, the court determined, but “incentive compensation,” and, therefore, could not be considered a wage.

Moreover, the Fourth Department held, “based on the law as stated by the court, the jury could not have rationally concluded that plaintiff’s collections bonus was vested and earned for purposes of the Labor Law before he left defendant’s employ.” The amount owed to Doolittle through the collections bonus was not, the court stated, the result of his work exclusively. What is more, considering that the case was settled after Doolittle left Nixon Peabody, it was difficult to definitively state that the fee collected vested while he was an associate at the firm.

At the same time, the court held that the verdict, insofar as it entitled Doolittle to recover damages for breach of contract, should be upheld. It is reasonably clear, the court argued, that Nixon Peabody set forth, at regular meetings, the terms of their collections bonus policy, that Doolittle was aware of this, and that it encouraged him to obtain the client whose case generated a $5 million fee. “In sum,” the court concluded, “the evidence adduced by [Doolittle] established, prima facie, that the parties entered into a binding oral agreement in which at least one of [Nixon Peabody’s] partners promised to pay [Doolittle] a bonus consisting of 5 percent of the fee collections from any client generated by [Doolittle] if such fees exceeded $100,000, that [Doolittle] subsequently performed under the agreement by generating the client, and that [Nixon Peabody] breached the agreement by failing to pay the collections bonus, thereby causing [Doolittle] to incur damages.”

Conclusion

Given the narrow statutory definition of wages pursuant to Labor Law Section 190(1), and the Court of Appeals decision in Truelove, employees often have an uphill battle demonstrating that a bonus is a “wage.” The Appellate Division, Fourth Department, in applying the circumstances of an attorneys’ fee sharing bonus to the law, has offered helpful guidance in determining when such arrangements are “wages” subject to the Labor Law or instead claims for breach of contract.

Maria Ciampi, of counsel to Ciampi LLC, assisted in the preparation of this article.

Arthur J. Ciampi is the coauthor of the treatise ‘Law Firm Partnership Agreements’ and is the managing member of Ciampi LLC.