Failure to Pay Wages Cannot Be Basis of Labor Law Sec. 193 Claim for Improper Withholding of Wages

On August 22, 2018, Justice Friedman of the New York County Commercial Division issued a decision in Stec v. Passport Brands, Inc., 2018 NY Slip Op. 32052(U), holding that a failure to pay wages cannot be the basis for a Labor Law Section 193 claim for improperly withholding wages, explaining:

[T]he Labor Law does not provide a remedy for defendants' nonpayment of these wages. Labor Law § 193, on which Stec relies, provides, in pertinent part, that no employer shall make any deduction from the wages of an employee, except those which, as relevant to this case, are expressly authorized in writing by the employee and are for the benefit of the employee. The statute sets forth a non-exclusive list of potential authorized deductions, which include payments for, among other things, insurance premiums; pension or health and welfare benefits; dues or assessments to a labor organization; fitness center, health club, and/or gym membership dues; day care expenses; and similar payments for the benefit of the employee.

Here, the issue is whether defendants' withholding of and continuing failure to pay Stec his base salary constitutes an unauthorized deduction from wages within the meaning of section 193. In arguing that the withholding of wages is not a deduction, defendants principally rely on two recent federal decisions in a related Labor Law case, Goldberg v Jacquet. There, Goldberg, another Passport executive, sued Jacquet in federal court for, among other things, violation of the Labor Law after Passport began withholding a portion of Goldberg's salary to cover general business and operating expenses. Jacquet moved for summary judgment dismissing the complaint, including Goldberg's Labor Law § 193 claim. He argued, as he does here, that withheld salary payments do not constitute deductions and are instead a failure to pay wages not addressed by § 193. The District Court agreed, holding that the majority, and more persuasive, interpretation of § 193 is that it has nothing to do with failure to pay wages or severance benefits, governing instead the specific subject of making deductions from wages. As explained by the Court: A deduction is more targeted and direct than the wholesale withholding at issue here, and New York courts recognize that the purpose of section 193 is to place the risk of loss for such things as damaged or spoiled merchandise on the employer rather than the employee. The Court thus rejected Goldberg's attempt to portray the withholding of his wages as a deduction, as this would sanction a skewed interpretation of § 193, which requires something more than the total withholding of wages; a specific instance of docking the employee's pay.

The Second Circuit affirmed, expressly adopting the District Court's holding that in order to state a claim for a violation of NYLL § 193, a plaintiff must allege a specific deduction from wages and not merely a failure to pay wages. According to the Court, the district court correctly ruled that although Goldberg did not receive wages to which he was entitled, his wages were not reduced in the manner prohibited by NYLL § 193. The Second Circuit also noted that wholesale withholding of wages is covered by NYLL § 191, which the parties agree does not apply to the plaintiff because he was an executive and therefore exempt from this provision.

Although the Goldberg decisions are not binding on this court, their reasoning was expressly adopted by the First Department in Perella Weinberg Partners LLC v Kramer, a decision issued shortly after the briefing of this motion. Citing Goldberg, numerous prior federal district court cases, and several New York cases, the Court held that a wholesale withholding of payment is not a deduction within the meaning of Labor Law § 193. The Court expressly stated that this issue was not addressed by the Court of Appeals in Ryan v Kellogg Partners Inst. Servs. or by this Court in Wachter v Kim.

The Perella Court's characterization of Ryan and Wachter is significant because these, and other, cases have permitted recovery, under Labor Law § 193, of unpaid compensation, where the compensation was vested as opposed to discretionary. In Ryan, after holding that the employee's bonus payment was due and vested, the Court of Appeals reasoned: Since the employee's bonus therefore constitutes wages within the meaning of Labor Law § 190(1), the employer's neglect to pay him the bonus violated Labor Law § 193, and entitles the employee to an award of attorney's fees under Labor Law § 198 (1-a). In Wachter, which was decided before Ryan, an employee claimed aggregate cash compensation, which was comprised of a number of elements, including an annualized draw and a bonus. The Court held that to the extent such compensation was non-discretionary, it constituted wages that are protected by Labor Law § 193 (1) and § 198.

. . .

This court accordingly concludes that the issue of whether Labor Law § 193 permits a cause of action to be maintained for wholesale withholding of wages must await further clarification by the appellate courts, but that Perella remains viable and convincing law. Compelling reasons exist for rejecting a reading of Labor Law § 193 that would permit a cause of action to be maintained for wholesale withholding of, as opposed to specific deductions from, wages. As noted in recent federal court decisions, the total withholding of wages is the essence of a breach of contract claim. Moreover, a deduction is more targeted and direct than the wholesale withholding' of wages. The extensive itemization of authorized deductions in section 193 supports the conclusion that a deduction is more targeted than a wholesale withholding.

In the instant action, Stec's Labor Law § 193 claim is based on defendants' wholesale withholding of his past due wages. Stec does not, either in his pleading or in opposition to this motion, identify any specific unauthorized deduction taken from his wages. Rather, the evidence in the record shows that defendants withheld Stec's wages due to Passport's financial problems and, arguably also, due to disagreements as to the terms of payment agreed to by the parties. This withholding is not the type of deduction Labor Law § 193 was designed to prevent.

In addition, it is undisputed that Labor Law § 191 authorizes a cause of action to be brought for nonpayment of wages by employees identified in that section (manual workers, railroad workers, commission salespersons, and clerical and other workers). It is settled that this section does not apply to executives. To permit Stec, a former executive of Passport, to recover unpaid wages under section 193 would create an exception that would effectively swallow the limitation in section 191 as to the categories of workers authorized to sue for unpaid wages.

(Internal quotations and citations omitted).

A significant part of our practice is negotiating and litigating disputes over employment contracts. These disputes often involve not just contract law, but also federal, state and local labor and employment law. Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client have questions regarding an employment dispute.