California Court Approves Commission Charge Back Policy
February 17, 2005

Summary

Last week, a California Court of Appeal upheld an employer's right to "charge back" unearned commissions against an employee's subsequent compensation. This decision confirms that employers may provide their sales employees with advances against commissions prior to the commissions being earned, and then deduct any unearned portions from subsequent commissions. (Steinhebel v. L.A. Times Comm., 2/7/05)

Details

The Los Angeles Times employs individuals that attempt to sell the newspaper over the telephone. If a telesales employee secures an order, they are given an advance for the commission on that order in their next paycheck. However, the LA Times policy expressly provides that a sale is not a "commissionable order" if the cusotmer "does not keep the paper for at least 28 days." If a new subscriber cancels the paper within 28 days, the commission advance is then charged back off any future commissions earned by the telesales representative.

Kurt Steinhebel and some of his former telesales compatriots sued the LA Times, alleging that these charge backs were unlawful under California law. Specifically, they argued that the commission advances were earned wages and, therefore, the employer was was not permitted to make deductions from them. The appellate court disagreed. The court found that the LA Times had made it clear in its policies that the payments were an advance, which the court concluded is not a wage. Because the payment was an advance, the court held that the employer was permitted to charge back advances that became unearned due to the customer cancellations.

The plaintiffs also tried other theories to attack the LA Times' charge back practice, claiming that it constituted an illegal kickback and that it inappropriately held employees liable for business losses. Both of these theories were rejected.

You can access the full text of the decision by clicking here.

What this Means

This is good news because many employers with sales organizations have similar policies or practices. The key point to note is that the LA Times prevailed because their policy was clear that commissions were not earned until the subscription was maintained for 28 days, and that the earlier payment was merely an advance. If their policy had not been clear in this regard, the result might have been different. Thus, this case is a good reminder for employers to review their commission policies to make sure that they carefully define when commissions are actually earned and become irrevocable.

This E-Update was authored by Mike Sullivan. For more information, please contact Mr. Sullivan or any Paul, Plevin attorney at 619-237-5200.

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