Proper Use of “Advances” and “Chargebacks”

By the end of 2012, Labor Code 2751 will require California businesses to place all of its commission compensation arrangements with their employers in writing or such agreements may be unenforceable. See, Employee Commissions, California Requires Written Agreements by End of 2012.   As the year edges to a close, employers should thus confirm their commission plans are documented in clearly expressed policy memos or written agreements.

The recent California Court of Appeal decision in Deleon v. Verizon Wireless (July 10, 2012) illustrates the importance of drafting unambiguous commission plans, particularly where the business is prone to class action claims as a large employer such as Verizon.

Verizon’s written plan established that after a guaranteed minimum base pay, sales representatives received advance payments of their anticipated commissions which were not actually earned (“vested”) until the expiration of a chargeback period during which the consumer had the right to cancel the service. The plan thus allowed the employer to make later deductions from the advanced amounts to calculate the final “earned” amount for a given time period.

The plaintiff, Deleon, worked as a Verizon sales representative for some nine months, subject to the company’s written advance payment and chargeback plans in effect during that time.  Claiming he was qualified to represent numerous other sales representatives under a class action, Deleon challenged the plans as an alleged “secret underpayment of wages” under Labor Code section 223.

Deleon contended the initial payment of commission monies should not qualify as unearned “advances” and instead should be regarded as earned wages.  Thus, he asserted that later deductions from these initial payments were improper “secret deductions” from wages.

Verizon prevailed in the case.  The court commended the employer’s clarity in its written plans: “As specifically described in the compensation plans, Deleon received advances and his commissions were earned at the expiration of the chargeback period.  Section 223 refers to the underpayment of wages. Commission advances are not wages.” Emphasis added.

The Deleon v. Verizon Wireless decision thus underscores the importance for carefully drafted commission agreements.  If Verizon had failed to make clear that initial payments were unearned amounts pending its well-defined consumer chargeback periods, the case may well have had an entirely different outcome with significantly negative impact on that employer.

For assistance creating complete and comprehensive sales commission agreements, contact a knowledgeable labor law attorney.