Gagnon v. Prudential Securities, Inc., 46 A.D.3d 149 (2004)

New York Labor Law § 193 permits employers, with informed employee authorization, to deduct wages for investment plans, even if the plan includes a forfeiture provision, provided the plan, viewed in its entirety, benefits the employee.

Summary

This case addresses whether Prudential’s MasterShare Plan, which allows financial advisors to defer taxes by deducting wages to purchase stock index fund shares, violates New York Labor Law § 193. The plan included a three-month deferral period without interest and a forfeiture clause if the employee left Prudential or was terminated for cause within three years. The court held that the plan did not violate the law because it provided benefits to the employee, such as tax deferral and discounted share purchases, outweighing the potential for forfeiture, especially given the employees’ financial sophistication and informed consent.

Facts

Prudential offered its financial advisors the MasterShare Plan, allowing them to deduct 5-25% of their gross pay to purchase shares in a stock index fund at a 25% discount. The deducted wages were held in a deferral account for three months without interest. Shares purchased were non-transferable and forfeitable for three years if the employee left Prudential or was terminated for cause. Gagnon, a financial advisor, participated in the plan. Prudential terminated Gagnon’s employment, and he forfeited approximately $165,000 in his MasterShare account.

Procedural History

Gagnon sued Prudential in New Jersey state court, alleging the MasterShare Plan violated New York Labor Law § 193. Prudential removed the case to Federal District Court. The District Court granted Prudential’s motion for summary judgment, dismissing the Labor Law § 193 claim. The Third Circuit Court of Appeals certified a question to the New York Court of Appeals regarding the legality of the plan under Labor Law § 193. The New York Court of Appeals accepted certification.

Issue(s)

Whether New York Labor Law § 193 permits an employer, with an employee’s written and informed authorization, to enable that employee to defer wage taxes by making wage deductions and denying the employee any interest in those deducted wages for three months, and then investing the deducted wages in Standard & Poor’s 500-mirroring index fund shares that, while beneficially owned by the employee, are temporarily non-transferable and forfeitable to the employer if the employee quits or is terminated for cause.

Holding

Yes, because Labor Law § 193 allows employees to divert part of their earnings into investment plans, provided the plan, viewed in its entirety, benefits the employee, and the employee provides informed consent. The possibility of forfeiture on these facts does not warrant ineligibility under section 193.

Court’s Reasoning

The Court reasoned that Labor Law § 193 permits wage deductions expressly authorized by and for the benefit of the employee. It examined the history of the statute, noting that it was intended to prevent deductions for the employer’s benefit but allowed voluntary deductions for investments. The Court emphasized that the MasterShare Plan, offered to sophisticated financial advisors with full disclosure of the forfeiture risk, provided benefits such as tax deferral, discounted share purchases, and shareholder rights during the restricted period. The court stated, “Rather than adopt a per se rule, we believe that whether a wage deduction for investment is ‘for the benefit of the employee’ can be determined only by examining the investment plan in its entirety, giving due weight to the existence of a forfeiture provision.” The court distinguished this plan from deductions solely benefiting the employer, concluding that the disclosed risks did not negate the benefits these knowledgeable employees received from their voluntary participation in the program. The Court noted that the Department of Labor’s stance appeared to conflict with other departmental opinions that approve of wage deductions despite the possibility that the withheld funds could be forfeited, and stated that “wage deductions directed into the investment plan in this case qualify as ‘payments for the benefit of the employee,’ which are ‘similar’ to the types of wage withholdings specifically authorized by the statute”.