Court of Appeal: Advanced Commissions May Be Recovered

Verizon paid certain employees on commission. The commissions were paid on wireless subscriptions.  However, if customers canceled their service, Verizon would charge back the commissions that were advanced to employees under the assumption that the customer would pay for the entire subscription. Here is the court of appeal's description of the commission plan:

The compensation plans explain that commissions on the sale of cell phone service plans are paid in advance, but not earned until the expiration of a chargeback period during which the customer may cancel the service. The 2004 compensation plan stated: "Customer retention is an important element of earning any commission; therefore your commission for sales of service is not earned until after the expiration of the applicable chargeback period. However, as a benefit to employees so that they will have use of the money before it is actually earned, Verizon Wireless has a policy of advancing commission dollars, if certain requirements are met, for the sale of commission-eligible services." The 2005 compensation plan stated: "Your commission . . . is not earned and the sale does not „vest‟ until . . . your customer satisfies his [or her] contract during the applicable chargeback period."

The compensation plans include a section entitled, "Chargeback of Commission Advance." The 2004 compensation plan stated: "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. Your commission advance will be adjusted to account for disconnects within the chargeback period . . . ." The 2005 compensation plan stated if a customer disconnects service during the chargeback period, "the sale is not considered vested[.]"

Deleon, a Verizon employee, brought a class action agianst Verizon, challening Verizon's right to recover advanced commissions. Deleon's point apparently is that he sold the plan to the customer. If the customer makes a return or cancels, Verizon must pay him the commission anyway and absorb the loss.  That's why there's little chance there will be a company called "Deleon Wireless" any time soon.

There is no allegation that Verizon failed to honor its plan, or that Deleon was underpaid. The entire focus was that he should be paid more, on sales that did not bear fruit.

Nice try. The trial court granted summary judgment, and the court of appeal affirmed. The courts decided that Verizon's plan was clear, Deleon had notice of it, and Verizon followed the plan correctly. The plan defined when commissions were "earned" and paid money in advance, but reconciled the advances against future earned commissions. Therefore, the courts held, Verizon's plan was lawful.

The court of appeal also made a refreshing observation.  If the plaintiff's argument prevailed, Verizon most likely would have dispensed with making advances. Employees would then have to wait up to a year to "earn" commissions when the subscriptions were fully paid. 

The case is Deleon v. Verizon Wireless, LLC, and the opinion is here.

New CA Law Requires Written Commission Agreement

Governor Brown has mercifully vetoed many of the loony ill-conceived employment law bills that the legislature passed this term. But he signed AB 1396, which is going to impose a serious burden on employers who pay employees via commission.

The new law requires employers who pay employees via commission to (1) have a written contract with the employee regarding commissions (2) include the method for calculating the commissions (3) require the employee to sign a "receipt" retained by the employer. 

Also, the contract remains in effect until a new commission plan has superseded it or employment terminates, even if the old plan expires.

Finally, the law attempts to define commission and excludes bonuses, but then includes bonuses that are a percentage of sales or profits. Now, commissions aren't percentages of profits. So, some bonuses will be included in this provision.

I predict a lot of work for SV drafting commission plans in 2012.

The law takes effect 1/1/13. The text is here. 

DGV

Court of Appeal: No Post Termination Commissions for You

Here are the facts as stated by the court:

Defendant hired plaintiff as a sales representative on October 4, 1999. On that date, the parties entered a written employment agreement, which provided (among other things) that: (1) plaintiff was responsible for web-hosting sales; (2) plaintiff‟s starting salary was $24,000 per year, plus commissions of 4 percent "on all direct initial sales"; (3) defendant "will be eligible for commission pay as set forth in this [document], so long as [plaintiff] remains employed with the Company as a Sales Representative"; and (4) the employment agreement "may be amended only by a written agreement executed by each of the parties hereto."

In April 2001, defendant promoted plaintiff to "Channel Manager." The parties entered a new oral agreement that provided (among other things) that: (1) plaintiff‟s salary was increased to $75,000 per year, and (2) plaintiff would receive commissions of "„20% of the up front costs‟ revenues on all accounts brought in by [plaintiff] or through [plaintiff‟s] contacts or efforts."

So, the plaintiff was later fired and sought commissions for a transaction that occurred after he left, but which was (at least according to him) was "through plaintiff's contacts or efforts."

The court made short work of the plaintiff's argument that he was entitled to post-termination commissions. On plaintiff's breach of contract claim, the court held:


We agree with defendant that, on its face, the italicized language is reasonably susceptible to only one interpretation—that once plaintiff ceased to be employed by defendant, he would no longer be eligible for commission pay. While plaintiff could have relied on extrinsic evidence (if there were such evidence) to suggest an alternative meaning of this provision, he did not do so. (Compare Wolf v. Superior Court (2004) 114 Cal.App.4th 1343, 1358 ["[T]his extrinsic evidence of trade usage exposed a latent ambiguity in the contract language and presented an alter[n]-ative interpretation to which the term „gross receipts‟ was reasonably susceptible in the circumstances."].) Accordingly, we conclude as a matter of law that the written employment agreement precludes plaintiff from collecting additional commissions post-termination.

On the plaintiff's claim under the Labor Code, the court said that although commissions are wages:

for purposes of enforcing the provisions of the Labor Code, "[t]he right of a salesperson or any other person to a commission depends on the terms of the contract for compensation." (Koehl v. Verio, Inc. (2006) 142 Cal.App.4th 1313, 1330; see also Steinhebel, at p. 705 ["contractual terms must be met before an employee is entitled to a commission"].) Accordingly, plaintiff‟s right to commissions "must be governed by the provisions of the [employment agreement]." (Steinhebel, at p. 705.) We have already concluded that, pursuant to the plain language of the written employment agreement, plaintiff was not entitled to any further commissions after he was terminated. Accordingly, defendant‟s failure to pay such commissions cannot constitute a violation of the Labor Code.

The court did not consider whether the commission contract was "unconscionable" because it was not pleaded. So, that door remains open in commission cases. However, the court also did not consider the question of whether commissions were "earned" before termination and therefore should have been paid. Presumably, that issue was not argued by the plaintiff. If your plaintiff makes this argument, this case could be distinguishable.

Finally, there is the argument that the employer fired the employee to avoid paying unpaid commissions. But the plaintiff waived that argument too. So, because this case was not as vigorously litigated as it might have been, be careful before you rely on it too heavily. On the other hand, the courts will enforce straightforward commission plans that contain contingencies on the right to payment, such as continued employment.

The case is Nein v. Hostpro, Inc. and the opinion is here.

DGV