On July 10, 2012, a California court of appeal held that an employer’s practice and policy of charging back advanced sales commissions following a canceled service agreement does not violate California law. The Court held that these advanced commissions are not wages; thus they do not come within the ambit of California Code of Civil Procedure section 223 which prohibits the secret payment of lower wages and exposes the employer to PAGA penalties.

In Saul Deleon v. Verizon Wireless, LLC, Plaintiff brought a class action against his former employer alleging, in part, that the commission payments charged back by Verizon following a customer’s disconnection of services were actually wages not advances, and that the policies at issue were unclear and unreasonable. In its defense, Verizon argued that its chargeback policy did not violate law as the payments were advances, not wages; the policies were set forth clearly and not kept “secret” from the employees; and the provision did not result in a payment of lower wages than designated in the compensation plans.

Affirming the lower court’s summary judgment in favor of Verizon, the court found no triable issue of material fact as to whether the commission payments should be treated as wages as opposed to advances nor was there a triable issue as to the employees’ knowledge and acceptance of Verizon’s commission and chargeback policies. In so holding, the Court clarified that, although sales commissions are wages, the right to commissions depends on the terms of the contract and any terms that must be met before such commissions are earned. Because the terms of the Verizon compensation plans clearly subjected the employees to certain conditions and specifically defined such payments as “advances”, such as the customer continuing service during a defined chargeback period, the commission was not “earned” until the conditions were met.

The Court also found that Verizon’s policy of reducing an employee’s future advances, instead of requiring the employee to pay back a portion of wages, steers clear of Section 223’s “secret underpayment” of wages. Moreover, the employee does not need to read, sign and specifically authorize such deductions. Rather, it is sufficient that the employee accepts the offer of employment and understands that she/he is bound by the terms in the compensation plans and related chargeback policies. In Deleon, Verizon made this showing by giving its employees copies of the plans, training employees on how the chargeback provision operates, and providing its employees with regular statements setting forth the employees’ advances and chargebacks for each monthly period. Under such circumstances, the court was convinced that the chargeback provision was not unconscionable and that the chargebacks were properly treated as advances under the law.