In sales, it is usually the case when the sale is made, but the customer has a set period of time to return the product. This presents an issue for an employer who pays the sales representative a commission. The employer does not want to pay a commission on an item sold that may be returned. On the other hand, the sales representative would like use of the money while waiting to the period of time the customer has to cancel the purchase. Add to the mix California’s very stringent requirements prohibiting chargebacks and protection of employee wages, and the issue becomes very complex. The decision in Deleon v. Verizon Wireless clarified the issue about whether employers may chargeback commissions that have not yet been earned by the sales representative.

The plaintiff, Deleon, worked as a sales representative for Verizon Wireless. He sued Verizon on the basis that its commission plan violated Labor Code section 223 by “secretly pay[ing] a lower wage while purporting to pay the wage designated by statue or by contract.” Verizon contended its chargeback policy did not violate section 223 because: (1) Deleon’s commission payments were advances, not wages; (2) the chargeback policy was set forth in the compensation plans and was not a “secret” underpayment of a lower than agreed-upon wage; and (3) the chargeback provision did not result in a payment of a lower wage than the wage designated in the compensation plans.

In agreeing with Verizon, the court held that while sales commissions are wages, the right to commissions is determined by the “terms of the contract for compensation.” Here, the agreement Verizon had with plaintiff clearly set forth the conditions necessary before a commission was earned. The plan was clear that commissions were only earned if the customer did not discontinue the cell phone service during the applicable chargeback period. The court held that until this chargeback period expired, plaintiff had not made a commission and the amounts provided to plaintiff were only advances. Because Verizon provided plaintiff an advance on the commissions, and if the customer cancelled the service before the chargeback period expired, it was permissible for Verizon to reduce the representative’s next advance as an offset of the cancelled sale.

The take away for employers: commission plans and agreements must be clearly drafted and set forth the conditions that must be met before the commission is earned. It must also set forth that any payments to the sales representative are only advances, not wages, until the sale is final. If the plan is clear, a chargeback against the advances are permissible should the sale not become final with the customer.