Deleon v. Verizon Wireless: Court of Appeal Holds that Employer Can Recover Advances on Commissions when Conditions of Sale Are Not Met

Deleon v. Verizon Wireless, LLC (7/10/12) --- Cal.App.4th --- is the latest in a line of decisions dealing with what are called chargebacks: when employers can or can't recover from employees amounts that have been paid either as commissions or as advances on commissions. Generally speaking, courts have held that an employer can recover an advance paid on a commission if the conditions precedent for earning the commission have not occurred, but cannot recover commissions already paid for completed sales.

The Court's introduction to the opinion is pretty clear and concise (my two main criteria for good legal writing):

Plaintiff Saul Deleon, on behalf of himself and other aggrieved employees, appeals from the judgment following the trial court's order granting summary judgment in favor of defendant AirTouch Cellular doing business as Verizon Wireless (Verizon Wireless). Deleon was a former retail sales representative for Verizon Wireless and filed a complaint seeking civil penalties under the Labor Code Private Attorneys General Act of 2004 (PAGA) (Lab. Code, § 2698) for a violation of section 223, which prohibits the secret underpayment of wages. Deleon's compensation plan included commission payments, which Verizon Wireless could recover, or charge back against future commissions, if certain conditions were not met. We must determine whether the chargeback provision violates section 223 by “secretly pay[ing] a lower wage while purporting to pay the wage designated by statute or by contract.” Based upon the undisputed facts, we conclude the commission payments were advances, not wages, and the chargeback provision did not violate the Labor Code because Verizon Wireless may legally advance commission payments to its retail sales representatives before completion of all conditions for payment, and charge back any excess advance over commissions earned against future advances should the conditions not be satisfied. Thus, we affirm.

Slip op. at 2.

The compensation plan at issue provided that commissions would be paid in advance, but not earned until the expiration of a chargeback period during which the customer could cancel the service. If the customer canceled the service during this period, the employer would recoup the advance from the employee.

The Court held that the employee's right to commissions was subject to certain conditions precedent set forth in the compensation plans. Slip op. at 9. Not surprisingly, the Court held that payments made before these conditions were satisfied were not earned commissions, but merely advances, and were subject to chargeback. Ibid. See Steinhebel v. Los Angeles Times Communications, LLC (2005) 126 Cal.App.4th 696.

The Court distinguished Harris v. Investor’s Business Daily, Inc. (2006) 138 Cal.App.4th 28
on grounds that the compensation plan at issue there did not clearly state that payments were advances, but appeared to be payment of fully earned commissions. Slip op. at 9-10.

Because Verizon paid only advances on commissions, its chargebacks of those advances did not violate Labor Code section 223. Slip op. at 12. Although Deleon did not sign a commission agreement, he accepted Verizon's commission plan by performing work for Verizon under the terms of the plan. Ibid. "Section 223 does not state that the compensation or wage contract must be a written contract signed by the parties." Slip op. at 13.

The Court rejected Deleon's argument that triable issues of fact barred summary judgment because he and others did not understand that the payments were merely advances.

Mutual consent necessary to the formation of a contract “is determined under an objective standard applied to the outward manifestations or expressions of the parties, i.e., the reasonable meaning of their words and acts, and not their unexpressed intentions or understandings.

***

Deleon received copies of the compensation plans, received training on how the chargeback provision operated, and received commission statements setting forth his commission advances and chargebacks. These undisputed facts objectively establish that Deleon understood that he would be compensated under the terms of the compensation plans.

Slip op. at 15.

Finally, the Court rejected the argument that the chargeback policy was unconscionable.

Verizon Wireless offered to consumers a cell phone service plan, and paid its retail sales representatives commission on sales. The company's choice of the relevant chargeback period does not “shock the conscience.” The net compensation a retail sales representative earns bears a direct relation to the product (cell phone service contract) he or she sold.

Slip op. at 16.

The opinion is available here.