PONTILENA v. MORGAN STANLEY SMITH BARNEY LLC

Filing 75

OPINION. Signed by Judge William J. Martini on 5/20/14. (gh, )

UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF NEW JERSEY

Civ. No. 2:11-03121 (WJM)

IN RE MORGAN STANLEY SMITH
BARNEY LLC WAGE AND HOUR
LITIGATION

OPINION
MDL 2280

WILLIAM J. MARTINI, U.S.D.J.:
This multidistrict litigation is made up of several putative wage and hour class
actions alleging overtime violations and improper wage deductions on the part of
Defendants Morgan Stanley Smith Barney LLC and Morgan Stanley & Co., Inc.
(together “MSSB”). Now before the Court is MSSB’s Federal Rule of Civil Procedure
12(b)(6) motion to dismiss Count III of the Third Amended Consolidated Class and
Collective Action Complaint (the “TAC”), which alleges impermissible indirect wage
deductions under New York law. There was no oral argument. Fed. R. Civ. P. 78(b).
For the reasons set forth below, MSSB’s motion is GRANTED.
Defendant MSSB is a financial services firm. TAC ¶ 19, ECF No. 74. Plaintiffs
are financial advisors who worked at MSSB during the period from 2008-2013. Id. ¶ 16.
MSSB paid Plaintiffs on a commission basis. Id. ¶ 35. As discussed in Plaintiffs’
Amended Complaint, Plaintiffs’ commissions were set forth in compensation policies
(the “Compensation Policies”). Am. Compl. ¶ 55. In its prior opinion, the Court
summarized the relevant features of the Compensation Policies. In re Morgan Stanley
Smith Barney LLC Wage & Hour Litig., No. 11-3121, 2013 WL 6255697, at *1 (D.N.J.
Dec. 4, 2013) (“MSSB II”). Under the Compensation Policies, Plaintiffs were permitted
to select a formula for their take-home pay. This formula would determine how Plaintiffs
monthly advances were calculated. Depending on a Plaintiff’s performance, the
Compensation Policies provided that these monthly advances could be retroactively
adjusted at the end of the year.
Plaintiffs allege that MSSB required them to develop their own client base. TAC
¶ 50. Plaintiffs further allege that in order to develop a client base, they were “required to
pay for certain business expenses that benefited MSSB. Id. ¶ 49. These business
development expenses included dinners and seminars with clients.
Id.
The
Compensation Policies for the relevant years provided that Plaintiffs would receive fixed
allowances for these expenses. Peker Aff., Exs. A-F, ECF No. 44. The allowances were
based on the revenue a given Plaintiff generated in the previous year. Several of the
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Compensation Policies explicitly stated that Plaintiffs could receive a greater allowance
at the discretion of MSSB.
On February 14, 2012, Plaintiffs filed a ten-count Class and Collective Action
Complaint asserting three types of claims: (a) overtime claims under the Federal Fair
Labor Standards Act and various state laws; (b) impermissible wage deduction claims
under various state laws; and (c) a single state law claim for failing to maintain records.
ECF No. 17. Plaintiffs alleged improper direct deductions for assistant compensation and
trading losses, and they alleged improper indirect deductions for business development
expenses. (The difference between the two kinds of deductions is that a direct deduction
involves an employer taking money out of a paycheck while an indirect deduction
involves an employer failing to reimburse monies the employee spent). MSSB moved
to dismiss one of the state overtime claims, all of the impermissible wage deduction
claims, and also the failure to maintain records claim. ECF No. 19. The Court granted
the motion, dismissing some counts with prejudice and other counts without prejudice.
In re Morgan Stanley Smith Barney LLC Wage & Hour Litig., No. 11-3121, slip op.
(D.N.J. Dec. 14, 2012) (“MSSB I”), ECF No. 31.
Plaintiffs amended their Complaint and MSSB subsequently moved to dismiss the
remaining wage deduction claims, which were pled under New York, Connecticut, and
New Jersey law. ECF Nos. 35, 42. The Court dismissed the Connecticut and New Jersey
direct and indirect wage deduction claims with prejudice. MSSB II, 2013 WL 6255697,
at **3-6. As for the New York wage deduction claims, which were pled under Section
193 of the New York Labor Law (“Section 193”), the Court dismissed the direct
deduction claim with prejudice, but it dismissed the indirect deduction claim without
prejudice. Notably for present purposes, the Court reasoned that the indirect deduction
claim could not withstand a motion to dismiss because Plaintiffs failed to allege that they
were required to spend their own money on business development expenses. Id. at *6.
After the Court issued its opinion, Plaintiffs filed a Second Amended Complaint.
ECF No. 60. Subsequently, Plaintiffs were granted leave to file the TAC. In Counts I-II
and IV-V, the TAC seeks to recover under federal and state law for overtime violations.
In Count III, the TAC seeks to recover under Section 193 for impermissible indirect
deductions in the form of unreimbursed business development expenses. Because the
TAC alleges that Plaintiffs were required to pay for their own business development
expenses, the Court will reach the legal question it did not have to address in its prior
opinion, namely whether MSSB made an impermissible indirect deduction from “wages,”
in violation of Section 193, when MSSB failed to reimburse Plaintiffs’ business
development expenses. The Court answers that question in the negative.
For present purposes, two subsections of Section 193 are relevant. First, with
certain exceptions, Section 193(1) prohibits employers from making direct deductions
from employees’ wages. Second, Section 193(3) prohibits indirect deductions. Section
193 provides:
No employer shall make any charge against wages, or require an employee
to make any payment by separate transaction unless such charge or
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payment is permitted as a deduction from wages under the provisions of
subdivision one of this section . . . .
As discussed in this Court’s prior opinion, the term “wage” in Section 193 has a
precise meaning. A “wage” is compensation that has been “earned.” MSSB II, 2013 WL
6255697, at *3 (quoting Pachter v. Bernard Hodes Group, 10 N.Y.3d 609, 617 (2008)).
The New York Court of Appeals has explained that “[if the] computation of a
commission . . . include[s] certain downward adjustments from gross sales, billings or
receivables . . . the commission will not be deemed ‘earned’ or vested until computation
of the agreed-upon formula.” Pachter, 10 N.Y.3d at 617-18 (emphasis added).
In MSSB II, the Court held that direct deductions for assistant compensation and
trading losses were not deductions from “wages” because the Compensation Policies
provided that a Plaintiff’s yearly salary formula would only be computed after deductions
were made from their monthly advances. In the TAC, Plaintiffs argue that MSSB’s
failure to reimburse their business expenses violated Section 193(3) because an
analogous direct deduction for business expenses would have violated Section 193(1).
Defendants counter that this argument conflicts with the Court’s holding in MSSB II.
Specifically, Defendants argue that direct deductions for business development expenses
would be similar to direct deductions for assistant compensation and trading errors,
which are deductions that the Court has held to be proper under Section 193(1). Rather
than dispute this argument, Plaintiffs maintain that the Court must have implicitly
rejected the argument since the Court granted Plaintiffs leave to amend their indirect
deduction claim. This is incorrect: the Court did not reach the argument in its prior
opinion because it did not have to.
Having failed to distinguish the business development expenses from assistant
compensation payments, Plaintiffs argue that MSSB violated Section 193 because
Plaintiffs did not voluntarily spend their own money on business expenses. But the Court
held in MSSB II that Plaintiffs agreed to the Compensation Policies by continuing to work
at MSSB. MSSB II, 2013 WL 6255697, at *5. These Compensation Policies told each
Plaintiff how much MSSB would allocate to business development expenses, and some
of the Compensation Policies explicitly stated that Plaintiffs could receive a greater
allowance if MSSB agreed. If Plaintiffs chose to exceed their allowances in order to
build their client base and increase their commission, it is hard to see how they did so
involuntarily.
For the above stated reasons, the Court will DISMISS Count III WITH
PREJUDICE. An appropriate order follows.
/s/ William J. Martini
WILLIAM J. MARTINI, U.S.D.J.
Date: May 20, 2014

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