When a rep is laid off or changes firms, there's often a disagreement about how much she is due for her final months of work. You might think you need to hire a lawyer to maximize compensation. But even if a broker doesn't know exactly what she's owed because of sloppy record keeping during flush times, it is possible to take effective action against the firm on her own.
Does hiring a lawyer make sense? Depending on the size of the claim, legal representation may cost more in hourly fees than the broker can expect to recover in arbitration. Likewise, it may be uneconomical for a lawyer to take a case with a modest financial claim on a contingent-fee basis because his legal fees would be only a percentage of the recovery.
Representing yourself is no free ride, but firms and brokers have agreed to fight such battles in arbitration, a more user-friendly environment for brokers than the courts for filing their own cases and presenting evidence. Depending on the amount in question, a claim will be heard by one arbitrator or a panel of three.
To start the process, the broker files a Statement of Claim with the NYSE or NASD laying out the facts and the amount allegedly owed by the firm. The exact amount can be fine-tuned at the hearing. The filing fee varies based on the amount owed; currently, it averages upwards of $1,100. Once the claim is filed, a copy is sent to the firm, which has at least 20 days — and likely more if requested — to respond. The firm's answer addresses the points in the broker's claim. Once the answer is filed, the broker and the firm can request documents and information from one another to assist them in proving their case. This is the broker's opportunity to request production runs and commission and transaction reports to determine specifically how much is due.
At the hearing, each side can present witnesses and documents supporting its position. Generally, the arbitrators (who aren't necessarily lawyers) don't follow the rules of evidence used in a courtroom; they evaluate the evidence on a “rough justice” basis. After the hearing, they issue a written award clarifying who wins, how much, and perhaps the facts and their findings. In addition, arbitrators can decide at their discretion who should pay their costs and other fees and whether either party should pay the other's attorneys' fees.
In deciding whether to file and pursue a claim, a broker should weigh the likelihood that his employer will respond with winnable counterclaims. While arbitration was intended to be less formal than court, be warned: Firms take their litigation strategy seriously and will likely be represented by lawyers who aim to pummel the broker into submission. The firm's answer may adopt a tone of righteous indignation at the broker's audacity for having filed a claim along with hyperbole intended to frighten the broker and impress the arbitrators. In the face of a claim for unpaid compensation, firms often apply the old adage that the best defense is a good offense. Indeed, the firm may make its own claim against the broker alleging some wrongdoing that should void his claim or at least offset any money owed by the firm. Alternatively, a firm might assert that the broker was advanced monies (a draw) against commissions not yet earned; that termination of employment has caused acceleration of an outstanding loan; or that the broker breached some confidentiality agreement or other restriction on the solicitation of clients or employees.
A broker needs to do a basic risk/reward calculus: Is the value of the potential recovery less than the cost of winning? What is the risk of being sued back by the employer and the monetary value of that risk? Occasionally, a broker who files a claim on his own behalf may wind up having to hire a lawyer to fight a counterclaim.
The timing of the claim may be an important factor in executing the risk/reward calculus. For example, a broker leaves Firm X for Firm Y and wasn't paid his last month's commission. If the broker files a claim against Firm X right away, the likelihood may increase that Firm X will assert a counterclaim against the broker alleging, possibly, that he wrongfully solicited the firm's clients and diverted the business to Firm Y. Yet if the broker waits several months to file his unpaid compensation claim, Firm X will have a harder time at that late date enjoining the broker for diverting business. However, if Firm X seeks an injunction against the broker immediately after his resignation, it may make more sense to assert the claim for unpaid compensation right away as a defensive measure.
Taxes may also be a consideration. Suppose a broker was given a $1 million, five-year forgivable loan upon joining Firm X. Now, well into the fifth year, the broker moves to Firm Y and believes that she is due $100,000 in unpaid commissions, which Firm X won't pay. Firm X may elect to not pursue the unforgiven balance of the loan, which may by then amount to about $200,000. At some point, the $200,000 debt will be deemed forgiven and become taxable ordinary income to the broker. If the broker has a combined tax rate approaching 50 percent, the net value of the forgiveness is only $100,000. Under such circumstances, it may not be worth pursuing the $100,000 commission owed and risk the firm pursuing her for the $200,000 debt balance. On the other hand, if the commissions left on the table were $300,000, the risk/reward picture changes.
Arbitration is no game. It requires a thoughtful, well-planned approach with vigilance paid to many variables. Self-representation is not for the faint-hearted. It is a useful tool for brokers who can do an objective risk/reward evaluation and have the confidence to master the process.
Jonathan P. Arfa is a New York employment lawyer representing brokers.