Employer’s Chargeback Of Advances On Employee’s Commissions Did Not Violate Labor Code

An employer did not violate the provision of the Labor Code that prohibits the secret underpayment of wages when it deducted payment amounts from an employee’s commission which were previously paid that exceeded the commission actually earned.  A court of appeal found that the commission payments made for commissions not yet totally earned were advances, not wages.  (Deleon v. Verizon Wireless, LLC (— Cal.Rptr.3d —-, Cal.App. 2 Dist., July 10, 2012).


Saul Deleon (“Deleon”) worked for Verizon Wireless, LLC (“Verizon”), as a retail sales representative.  Verizon’s compensation plans for the time of Deleon’s employment provided that commissions on the sale of cell phone service plans was not earned until the expiration of a chargeback period, or the period in which a customer could cancel a service.  However, Verizon had a policy of advancing commission dollars, provided certain conditions were met, when an employee sold commission-eligible services.  An employee did not earn the commission until the customer who purchased the service satisfied his or her contract during the chargeback period.

Verizon’s 2004 compensation plan provided, “In the event a customer disconnects service during the commission chargeback period, your commission is subject to adjustment by the original amount advanced for the sale.”  It further provided that an employee’s commission check would be adjusted for disconnects that occurred during the chargeback period.  The 2005 plan stated that a sale would not be considered vested if a customer disconnects service during the chargeback period.  The chargeback provisions did not affect an employee’s base pay.  If a customer disconnected his or her service during the chargeback period, Verizon would reduce the employee’s future commission by the original amount advanced for the sale that was later disconnected.  There was a 365 day chargeback period for postpaid price plans, a 150 day period for prepaid price plans, and a 120 day period for enhanced services. 

Each compensation plan contained an acknowledgement section, which stated that the employee’s signature or his or her continued employment indicated that he or she received and read the plan and that the plan would govern how incentives and sales commissions were advanced, earned and issued.  Verizon provides a written copy of its compensation plan to new hires at their orientation, reviews the plan with them, conducts training on how the plan operates, and provides yearly training on the compensation plans.  Verizon trained Deleon on the compensation plans in effect at the time of his employment. 

After Deleon resigned his employment, he filed a class action lawsuit against Verizon alleging violations of Labor Code section 223, which prohibits the secret underpayment of wages.  Deleon also alleged additional Labor Code violations but these allegations stemmed from his section 223 claim.  The trial court granted summary judgment in favor of Verizon. 


The court of appeal affirmed the decision of the trial court.  The appellate court concluded that because the commission payments Verizon made to Deleon were advances, not wages, the compensation plans’ chargeback provisions did not violate the Labor Code.  The court held “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.” 

Labor Code section 223 mandates that the commissions paid by Verizon to Deleon and the employees he seeks to represent in the class action “must be consistent with the applicable contract for wages, in this case, the compensation plans.”  Section 223 prohibits the secret underpayment of contractual or statutory wages.  The issue before the court was whether the compensation plans’ chargeback provisions violate section 223 by underpaying the commissions owed by Verizon to the retail sales representatives.  The court held that the chargeback provisions did not violate section 223.

Verizon’s commission payments under the compensation plans are advances, not wages, until the time that the conditions have been satisfied.  Section 223 provides that “it is ‘unlawful to secretly pay a lower wage’ than designated in the contract.”  The term “wages” means “all amounts for labor performed by employees . . . whether the amount is fixed or ascertained by the standard of time, task, piece, commission basis, or other methods of calculation.”  Commissions on sales are wages but the right to commissions depends on the terms of the contract for compensation.  An employee is not entitled to commission until the terms of the contract are met. 

Deleon’s right to commissions depended on a customer not discontinuing service during the applicable chargeback period.  Until the chargeback period had passed, Deleon had not made a commissionable sale.  Section 223 is concerned with the underpayment of wages.  However, advances on commissions are not wages.  Because commission advances are not wages, there is no violation of section 223.

Section 223 was enacted to stop employers from taking secret deductions or kickbacks from employees.  The chargeback provisions do not require employees to pay back a portion of their wages or allow Verizon to secretly deduct amounts owed to the employees.  Sales representatives are not earning less than they are entitled to under the compensation plans.  Instead, “[t]he chargeback provision reconciles commission advances, not earned commissions, by reducing the next advance on commissions to the employee.”  This practice does not violate section 223 because Deleon and other employees were paid the commissions owed to them under the compensation plans. 

Also, section 223 does not require that a wage or compensation contract be a written contract signed by the parties.  An employee’s continued performance of a job can show his or her assent to be bound by the terms of a compensation plan. 

The court concluded that the chargeback provisions were not unconscionable.  Verizon’s retail sales representatives were not charged with the company’s business losses.  Accordingly, the court affirmed the decision of the trial court granting judgment in favor of Verizon. 


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