Yesterday, a California court held that a commission plan providing for chargebacks against commissions did not violate California law. The plaintiff in the case was a sales representative for Verizon Wireless and as such, his job was to sell cell service plans to customers. He was paid a base wage plus commissions for his work. Verizon's commission plan clearly stated that commissions would be advanced to sales representatives based on securing signed contracts from customers, but that commissions were not actually earned and vested until expiration of a prescribed chargeback period (up to 365 days in some cases). If a customer cancelled their service during the chargeback period, any commission advanced to the sales representative on that contract would be charged back against future commission advances. The plaintiff filed a lawsuit alleging a PAGA violation and related Labor Code claims, all stemming from the central allegation that the chargeback practice violated Labor Code section 223 (which prohibits employers from secretly paying a wage less than that agreed to). Verizon argued that its chargeback policy was lawful and the trial court agreed, throwing out the plaintiff's claims on summary judgment. The plaintiff appealed, and yesterday a court of appeal agreed with the trial court. The court reasoned that commission plans are matters of contract and the Verizon plan clearly explained that commissions were not earned or vested (and hence, not "wages") until the specified chargeback period expired without cancellation by the customer. The plan also made clear that commissions paid to employees prior to the expiration of that period were merely advances on commissions and would be subject to chargeback in the event of cancellation during the chargeback period. The court found that Verizon had clearly communicated the written plan to the plaintiff and also trained plaintiff and other representatives on the plan. As such, the contract terms could not support a finding that Verizon was underpaying "wages" or otherwise violating the compensation agreement by virtue of its chargeback policy.
The plaintiff also argued that the chargeback policy was unconscionable because it operated to shift business losses to the employees, and plaintiffs disputed that they had any responsibility for customer cancellations during the chargeback period. The court rejected this argument as well, reasoning that to find a contract term unconscionable, it has to be of such a nature as to "shock the conscience," as opposed to being found merely "unreasonable." The court held that Verizon's chargeback policy did not rise to the level of shocking the conscience and had some business justification because the net compensation a sales representative received bore direct relation to the product (cell phone service contract) sold and any chargebacks were tied directly to the representative responsible for the sale.
The case is Deleon v. Verizon Wireless LLC, and the full opinion is here. Although the outcome in this case is a favorable one for employers with similar commission plans, it also serves as a good reminder that commission plans must be in writing, with some evidence of receipt by the covered employees, and the commission plan should clearly spell out the circumstances under which commissions are deemed earned and payable.