Is a Lengthy Chargeback Period Permissible in a Commission Plan?


As we have reported previously, Labor Code Section 2751 was amended to require all employers who pay employees on a commission basis to have a written contract governing the commission terms in place by January, 2013. However, as most employers know, even a written commission contract or plan is subject to challenge under various provisions of the Labor Code. In Deleon v. Verizon Wireless, a California Court of Appeal recently rejected one such challenge to the employer’s commission plan and upheld the enforceability of Verizon’s chargeback provision.

Verizon’s commission plan provided that employees would earn commissions on sales when the “chargeback period” expired, if the customer had not cancelled service. The commission plan provided different chargeback periods for different customer contracts, with the longest chargeback period being a year. Verizon advanced commissions against sales during the chargeback period but if the customer cancelled before the chargeback period expired, Verizon charged back the previously advanced commissions against other advanced commissions. The plaintiff class of employees challenged the Verizon commission plan, arguing that it violated, among other provisions, Labor Code Section 223, which prohibits the secret underpayment of wages.

In analyzing the issues raised by the plaintiffs, the Deleon court confirmed that commission compensation is a matter of contract and that commissions are not “earned” until all the conditions of the contract are fulfilled. The court rejected plaintiffs’ argument that Verizon was “secretly” underpaying wages, because the terms of the commission plan were not a secret and Verizon charged back commission advances that were not earned against other commissions advanced to the employee. The court rejected the notion that charging back the commission advance was an unlawful deduction from wages under Labor Code 224, reasoning that the commission advances were not wages, but rather, advances. As a result, the court concluded that a written authorization under Labor Code 224 was not required for the deduction. The court also rejected the plaintiffs’ argument that the one year chargeback period was unconscionable.

The court’s analysis in Deleon confirms the importance of having a written commission plan which specifically defines the terms under which commissions are earned and any circumstances under which commissions are advanced, deducted or otherwise paid to employees. The Deleon court focused on the specific definition of commissions, advances and wages contained within the written plan. In addition, the Deleon court was clearly persuaded that Verizon employees were not in the dark about the plan as Verizon provided clear communications and extensive training to employees about the commission plan terms. If you have any questions regarding your commission plan, or any other issue relating to employment law, please contact one of our attorneys:

Daniel F. Pyne III
Richard M. Noack
Ernest M. Malaspina
Karen Reinhold
Erik P. Khoobyarian
Shirley Jackson


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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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