Several recent cases
have examined when the practice of subjecting employee commissions to a
“chargeback” if a customer cancels an order within a certain time period violates
California Labor Code section 221 prohibiting taking back any wages from an
employee after they are earned. The key issue in these cases is whether the
commissions are wages.
Now, in a new case, a
has upheld a chargeback program used by Colorado-based Verio, Inc., which sells
Internet access. We’ll examine the ruling and the features of Verio’s program
that helped convince the court that the commissions weren’t wages.
Advance Commissions Paid
Verio sales associates
were responsible for selling Internet access, including the purchase and
installation of equipment and hardware. After booking an order, the sales
associate was the contact person for the customer to help resolve problems and
remained in touch to ensure the systems were installed and up and running.
Between 1999 and 2002,
Verio had a series of sales associate compensation plans, all providing for
base salaries plus commissions. Base pay remained the same regardless of how
many sales an associate made. Commissions, on the other hand, were earned on
sales that yielded revenue for the company. When a sales associate booked an
order, Verio would pay the associate an advance on the anticipated commission,
even though no verification was made at that point that the customer was a real
company or had the ability to pay.
Chargeback Program
The compensation plans
provided that Verio had the right to impose a chargeback on accounts cancelled within
a specified number of months after account activation. The chargebacks were
made by reducing commission payments in the month following the account cancellation.
The plans also made clear that Verio paid commissions before they were actually
earned—when the service or product had been delivered and accepted— and before
Verio received payment.
Sales associates had to
sign an acknowledgment accepting the chargeback terms each time a new
compensation plan went into effect. The company also held employee meetings to
go over the commission and chargeback terms each time a new plan was
introduced.
The HR Management & Compliance Report: How To Comply with California Wage & Hour Law, explains everything you need to know to stay in compliance with the state’s complex and ever-changing rules, laws, and regulations in this area. Coverage on bonuses, meal and rest breaks, overtime, alternative workweeks, final paychecks, and more.
Commissions Weren’t
Wages
A group of sales
associates filed a class action lawsuit against Verio, alleging that the company
violated Labor Code Section 221 by imposing chargebacks. But now a California
Court of Appeals has ruled that the chargebacks were legal because the
commission advances were not wages.1
Two factors were key to
the court’s decision. First, the compensation plans made it clear that
commissions were not earned at the time of booking; several things had to
happen before commissions were earned—customers had to keep and pay for the
service or products for a specified number of months, and sales associates had
to perform various post-booking duties to earn the commission. Second, Verio’s
sales associates agreed, in writing, to the commission and chargeback policy,
and Verio held meetings with the employees to ensure that they understood the
policy and had the opportunity to ask questions about it.
Strengthening Your
Commission Agreements
You can take some steps
to help ensure that your commission chargeback program can withstand a legal challenge:
1. Put it in writing. Have a commission
agreement that spells out the conditions that must be satisfied for the
employee to earn the commission. The agreement must also set forth when
chargebacks will be made. Keep in mind that chargebacks can only be made on advances,
not on money that has already been “earned.”
2. Get it signed. Have employees sign the
agreement, acknowledging that they have read and understood its terms and agree
to them. As Verio did, it’s a good idea to meet with employees, either
individually or in groups, to explain the chargeback terms and give them a
chance to ask questions.
3. Be clear. The agreement should be
drafted in plain language, avoiding legal or technical jargon. Also, don’t bury
an important provision in the fine print.
You can link to the new
ruling online at www.courtinfo.ca.gov/opinions/.
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1 Koehl v. Verio Inc.,
(Dist. 1) Nos. A108972, A110110, A110447