In Deleon v. Verizon Wireless, LLC, the California Court of Appeal clarified when a commission advance may be “clawed back” by an employer. The answer depends on whether the advance payment was fully earned when advanced (which made the payment a wage which could not be clawed back) or if the advance payment had conditions attached (which made the payment an advance which could).
The employee in Deleon was a former retail sales representative for Verizon Wireless. The employee’s written compensation plan included commission payments which Verizon Wireless could recover (or “charge back”) against future commissions if certain conditions were not met. One specific condition stated that the advance was not earned until the expiration of a chargeback period during which a customer could cancel the service. If a customer canceled the service during the chargeback period, Verizon Wireless could recover the advance already paid. The issue in the case was whether such a chargeback provision violated Labor Code §223 by “secretly pay[ing] a lower wage while purporting to pay the wage designated by statute or contract.” The Court ruled that no violation occurred.
According to Deleon, an employer may legally advance a commission payment to a sales representative before the completion of all conditions for payment. Such advances were not wages because all conditions for payment had not been met when the payment was made. Thus, there is no violation of Labor Code §223 because that statute only protects “wages.” Employers with an otherwise valid commission plan may therefore claw back advances if the employer later determines that all conditions required to earn the commission had not been met.
The Court’s opinion is available here.
Note – California has a new commission contract law, AB 1396, which takes effect January 1, 2013. Under AB 1396, employers who pay commissions are required to enter into written commission contracts with their commission-eligible employees. The contract must describe the method by which commissions are computed and paid. Employers must also provide a copy of the signed contract to the eligible employee and get a signed receipt from that employee. In addition, when a commission contract later expires without being replaced, but the employee continues work, the terms of the “expired” contract will apply until the parties sign a new agreement or until the employment is terminated. As a result, it will be critical for employers to get new commission contracts in place before or when the old ones expire. A copy of AB 1396 is available here.