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Wage-Based Claims: Employer Liability After 'Ryan'

February 23, 2015New York Law JournalAttorneys: Jason R. Finkelstein and Jed M. Weiss

Originally published by the New York Law Journal.

In recent years, the world of employment litigation has seen a rise in both the volume and the high stakes of wage-based claims filed by employees against their employers. One such hot-button issue in New York involves employee challenges to employers' alleged deductions of certain wages from their paychecks. New York Labor Law §193 protects employees from such unlawful wage deductions, and courts are now being called upon to decide whether there has been an unlawful "deduction" from wages sufficient to bring a claim under §193. One particularly tricky issue arises when the employer allegedly fails to make any payment at all, and the employee attempts to bring a claim against the employer pursuant to §193. Logically, a "deduction" from the amount of wages due to an employee connotes a reduced payment, in contrast to an entire failure to pay anything.

In 2012, the New York Court of Appeals issued a controversial opinion in Ryan v. Kellogg Partners Institutional Services.1 The court in Ryan, in dicta, made a passing comment that a failure to pay wages may constitute a "deduction" under §193. The question of whether a deduction occurred, however, was never raised, briefed or argued before the Court of Appeals, thereby strongly calling into question what analysis, if any, the court devoted to this critical point. In fact, following Ryan, the majority of courts that engaged in a substantive analysis of this issue have resoundingly concluded that an employer's failure to pay any wages at all does not qualify as a "deduction" under §193.

In this article, we first discuss the contours of §193 in order to appreciate what the Legislature envisioned when enacting this statute. We then analyze Ryan and a series of more recent decisions arriving at contrary conclusions in the context of a total nonpayment of wages. Based upon the existing body of case law, as well as a plain reading of the statute, it is clear that §193 is aimed at protecting employees from employers' attempts to unlawfully reduce their wages, in contrast to employers failing to pay wages outright.
Intent and Scope of Labor Law §193

The original purpose of §193, enacted in 1966, was to prevent employers from unfairly taking advantage of their employees by unlawfully reducing the amount of employees' paychecks, and instead placing the risk of loss for such things as damaged or spoiled merchandise on the employer.2 The current version of §193, which was recently amended in 2012, precludes employers from making any deductions from wages except in specific, enumerated circumstances.3 Those circumstances include explicit categories of deductions that employees may elect to authorize their employers to remove from their paychecks, including, by way of example, insurance premiums, contributions to bona fide charitable organizations, discounted parking passes, fitness/health club membership dues, and day-care expenses.4 The common denominator among these permissible deductions is that they relate to payments withheld for specific benefits or programs. Violations of §193 subject employers to penalties as set forth in Labor Law §198 including, but not limited to, compensatory damages equal to the amount of the unlawfully deducted wages, liquidated damages, and reasonable attorney fees.

By contrast, notably absent from the statutory language of §193 is reference to an employer's complete failure to pay any wages or commissions to an employee. Instead, there is a distinct section of the New York Labor Law—§191—that concerns this issue and the frequency with which employers must pay their employees.5 This situation typically arises when an employer goes out of business and is no longer able to pay their employees' wages. This question—whether a total failure to pay wages is the equivalent of an unlawful "deduction" under §193 (and therefore subjecting the employer to liability under the Labor Law)—has resulted in substantial litigation in both the New York state and federal courts, and largely since the New York Court of Appeals' 2012 decision in Ryan v. Kellogg Partners Institutional Services.6
'Ryan' and Its Aftermath

In Ryan, the New York Court of Appeals was tasked with determining whether a jury's verdict was appropriate based upon New York contract law, not whether a failure to pay wages constituted a §193 unlawful deduction. In fact, violation of §193 was never alleged in the case; rather, §§190 and 198 of the Labor Law constituted the heart of the plaintiff's claims. Though the issue was never presented, briefed or argued before the Court of Appeals, the court in Ryan, in dicta, and without any substantive legal analysis whatsoever, made an off-the-cuff reference to §193 and stated that the employer's failure to pay Ryan's bonus violated the statute and entitled him to an award of attorney fees.7 Critically, the reference to §193 was made solely in the context of the court's discussion of whether attorney fees were recoverable, and not as part of its substantive analysis of the appeal. While a small handful of post-Ryan cases relied on Ryan in deciding "total failure to pay" claims,8 they are far outweighed by the myriad of decisions that analyze §193 substantively and arrive at a contrary, more thoughtful, conclusion.

By way of example, in September 2013, the Southern District of New York, in Hart v. Rick's NY Cabaret Int'l, analyzed whether the plaintiffs, a group of exotic dancers, had wages improperly "deducted" by their employers pursuant to §193, "even if such wages were never paid."9 In rejecting the employees' arguments that their employers' complete failure to pay constituted an unlawful deduction, the court held that reading such language into §193 was "not a tenable reading of the statute, as the clause 'deduction[s] from wages of an employee' naturally presupposes deductions from actual, paid wages. Because plaintiffs were never paid such wages, defendants are not liable under §193(1)."10Hart followed on the heels of several other federal court decisions arriving at the same conclusion that §193 does not, and was never intended to, address an employer's complete failure to pay wages, including Wang v. The Hearst Corp. (noting that there can be no "deduction" when "there is nothing from which to take away or subtract")11 and Church v. St. Mary's Healthcare (holding that Ryan does not apply to a claim for a failure to pay for hours worked).12

In another telling post-Ryan decision, Moras v. Marco Polo Network, the Southern District likewise dismissed the plaintiff's §193 Labor Law claim, holding that "Section 193 has nothing to do with failure to pay wages … governing instead the specific subject of making deductions from wages."13 In Malinowski v. Wall Street Source,14 decided only months before Ryan, the Southern District similarly found §193 to be entirely inapposite to a Labor Law-based claim for a failure to pay any wages. In Malinowski, the court held that "the majority, and more persuasive, interpretation of §193 is that it has nothing to do with failure to pay wages."15

At the New York state court level, Supreme Court Justice Charles E. Ramos, post-Ryan, recently decided Wachter v. Kim.16 There, the plaintiff, a former executive at a hedge fund that failed to launch at the turn of the 2008 financial market collapse, laid claims against the founder and managing member of the entity for nonpayment of wages under §193, without reference to any specific unauthorized deduction. Without paying any credence to the non-binding dicta in Ryan, Ramos adhered to the well-established body of case law supporting the proposition that §193 does not apply to a failure to pay wages, citing to such cases as Kletter v. Fleming,17Monagle v. Scholastic,18Moras,19 and Malinowski20 for support. In rejecting the plaintiff's claim, the court resoundingly held that "Section 193 of the Labor Law does not apply when a plaintiff merely alleges a failure to pay wages and cannot cite to a specific deduction from wages."21 Though the court in Wachter could have relied upon Ryan, it is more telling that the case was intentionally ignored for its lack of precedential value on this issue.

Notably, even cases that preceded the 2012 decision in Ryan, and which held that §193 deductions do not evince the concept of a total failure to pay, do not acknowledge Ryan as negative authority. Examples of such cases include, without limitation, the following: Hudacs v. Frito-Lay,22Kane v. Waterfront Media,23Kletter,24 and Monagle.25 One would reasonably expect that if Ryan was truly the dispositive, controlling authority on this issue, legal research efforts to "Shepardize" these pre-Ryan cases would flag Ryan as negative authority. Clearly, Ryan's statements in dicta are not binding on any state or federal court on this particular question, and so no such negative treatment is recognized.

In a similar vein, and as previously noted, the New York Legislature recently amended §193 in September 2012—several months afterRyan.26 The legislation, signed into law by Gov. Andrew Cuomo, established a series of expanded categories of permissible wage deductions, requiring that the employee has first provided written authorization. Such permissible deductions include discounted parking passes, daycare expenses and gym membership dues, among others.27 However, nowhere in the text of the amended version of §193, nor in the governor's memorandum accompanying the amendment, is there any mention or consideration for a "failure to pay wages." The Legislature, at the time the bill was passed, had Ryan at its disposal, but chose to remain silent on the issue of a failure to pay instead of further amending the statute to provide for such coverage. This is significant, and when combined with the current state of existing case law analysis of Ryan and §193, it is clear that an employer's total failure to pay wages was never envisioned to be protected by §193, and courts applying New York law should adhere to that legal conclusion.
The Next Chapter

While the overwhelming majority of recent New York state and federal decisions affirm the notion that an employer's wholesale failure to pay wages does not constitute an unlawful deduction under the Labor Law, employees continue to make arguments in reliance on the dicta in Ryan that such nonpayments violate §193. It is simply counterintuitive to conclude that a "deduction" in the amount payable to an employee—which is synonymous with a "reduction" in wages (i.e., some)—can be associated with a wholesale nonpayment (i.e., none). Ultimately, this issue will remain up for debate until the New York Court of Appeals is presented with an appeal that specifically implicates claims for an employer's total nonpayment of wages under §193. Until that time, employers will be forced to continue defending against such claims by former employees attempting to rely upon the unsubstantiated holding in Ryan. The stakes in such lawsuits are often high, so employers (and their counsel) must be cognizant of the current state of the law in order to best defend and protect themselves.

Endnotes:

1. 19 N.Y.3d 1 (2012).

2. See Karic v. Major Automotive Cos., 992 F. Supp. 2d 196 (E.D.N.Y. 2014); Angello v. Labor Ready, 7 N.Y.3d 579 (2006); Hudacs v. Frito-Lay, 90 N.Y.2d 342 (1997).

3. N.Y. Lab. Law §193(1).

4. Id. at §193(1)(b).

5. N.Y. Lab. Law §191.

6. 19 N.Y.3d 1 (2012).

7. Id. at 17.

8. See, e.g., Esmilla v. Cosmopolitan Club, 936 F. Supp. 2d 229 (S.D.N.Y. 2013); DiBari v. Morellato & Sector USA, 2012 WL 3527213 (N.Y. Sup. Ct. Aug. 9, 2012).

9. 967 F. Supp. 2d 901 (S.D.N.Y. 2013).

10. Id. at 952 (emphasis added).

11. 2013 U.S. Dist. LEXIS 3768 (S.D.N.Y. Jan. 9, 2013).

12. 2012 U.S. Dist. LEXIS 138338 (N.D.N.Y. Sept. 25, 2012).

13. 2012 WL 6700231, at *1 (S.D.N.Y. Dec. 20, 2012) (emphasis added).

14. 2012 WL 279450 (S.D.N.Y. Jan. 31, 2012).

15. Id. at *3, n.5 (emphasis added) (internal quotations omitted).

16. Wachter v. Kim, Index No. 650532/2008 (N.Y. Sup. Ct. Jan. 11, 2013).

17. 820 N.Y.S.2d 348 (3d Dept. 2006).

18. 2007 WL 766282 (S.D.N.Y. 2007).

19. 2012 WL 6700231 (S.D.N.Y. Dec. 20, 2012).

20. 2012 WL 279450 (S.D.N.Y. Jan. 31, 2012).

21. Wachter, Index No. 650532/2008.

22. 90 N.Y.2d 342 (1997).

23. 2008 WL 3996234 (N.Y. Sup. Ct. Aug. 20, 2008).

24. 820 N.Y.S.2d 348 (3d Dept. 2006).

25. 2007 WL 766282 (S.D.N.Y. 2007).

26. See N.Y. Assembly Bill A 10785-2011.

27. See N.Y. Lab. Law §193(1)(b).

Reprinted with permission from the February 23, 2015 edition of the New York Law Journal © 2015 ALM Media Properties, LLC. All rights reserved. Further duplication without permission is prohibited. For information, contact 877-257-3382 - reprints@alm.com or visit www.almreprints.com.

 

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