Court Clarifies Scope of Permissible Commission Chargebacks -- DeLeon v. Verizon Wireless, LLC

In DeLeon v. Verizon Wireless, LLC the California  Court of Appeal upheld the right of an employer to reclaim or "charge back" commissions which are provisionally advanced for sales that are later canceled.

California case law has been clear for some time in holding that the claw back of an "advance" that was never actually earned is not an illegal deduction from wages.  The usual scenario is an advance on a seemingly valid sale that is never finally consummated because the customer either cancels the order or fails to pay. 

DeLeon represents a slight variation on these facts only because it allowed commission advances to be reversed up to a year after the initial sale had been made where a customer canceled his cell phone service.  But in the context of an ongoing service plan (which may well have included loss leader incentives for the initial sign up), this is just a natural extension of the general rule that earning a commission may be legitimately conditioned on completing a final sale.          

Nevertheless, the discussion in DeLeon, especially when considered in conjunction with last month's decision in Sciborski v. Pacific Bell, begins to shed light on how courts will distinguish a legitimate contractual condition on earning a commission from an unlawful "deduction" or "withholding" of wages. 

Under the principles discussed in these two opinions it appears that courts will generally allow employers to deny a commission payment if an employee fails to fulfill a term that:

  • Is clearly expressed , preferably in writing, before the employee performs the work; and 
  • Is related to the sale itself.  

 By contrast, courts will tend to find a violation of California law where an employer denies a commission payment for a reason that:

  • Is unrelated to the successful completion of the particular sale itself;
  • Is outside the employee's ability to control or influence;
  • Is unpredictable or arbitrary; or
  • Is shifting a cost of doing business which the employer should pay to the employee.   

 It may be a long time before the case law is crystal clear in this area but the main outline of the rules is starting to come into focus.

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