In Koehl v. Verio, Inc., the California Court of Appeal, First District, reaffirmed two basic propositions under California law: (1) advances against commissions are not “wages” under Labor Code Section 200; and (2) chargebacks against excess advanced commissions are permissible when employees expressly agree, in writing, to a chargeback arrangement.

Verio, Inc. employed sales associates to sell internet services and equipment. Common to the industry, Verio paid its sales associates a base pay and commissions. As an incentive to its sales associates, Verio’s compensation plans provided for payment of commissions to its sales associates when an order was “booked” but before payment was received from its customers. Verio’s compensation plans also provided, however, that Verio was entitled to recover, or charge back, those commissions against future advances if certain conditions were not met (i.e., an order was cancelled or never installed, or a customer cancelled service within a certain period of time after placing its order). Thus, commissions were not actually “earned” at the time of booking but were treated as an advance against the condition precedent of the customer generating revenue for the company. Importantly, all of Verio’s sales associates signed and acknowledged the compensation agreements and acknowledgement forms each time a new agreement was introduced. Also, the company made presentations and held meetings to explain the compensation agreements and answer any questions or concerns the sales associates had with the commission plan/chargeback arrangements.

The plaintiffs, three of Verio’s former sales associates, filed a class action and representative action for restitution of wages (chargebacks), alleging that Verio violated the Labor Code by charging back previously paid commissions on sales that failed to generate revenue. Verio prevailed on all counts at trial, and the plaintiffs appealed.

On appeal, the Court affirmed that while the payment of commissions can be treated as “wages,” an advance against future commissions is not “wages” because all conditions for performance have not been satisfied. The Court held an employer may legally advance commissions to its employees, and by written agreement, charge back any excess advance over future commissions earned should the conditions for payment not be satisfied. The plaintiffs agreed, understood and admitted at trial that although commissions would be paid at booking, they were not in fact earned at that time.

The Court identified a number of factors supporting its conclusion that the chargebacks in this case were permissible: (1) plaintiffs executed acknowledgments indicating they read and understood their employment agreements/compensation plans and so their right to commissions was governed by the provisions of those agreements; (2) Verio only sought recovery of the advanced commissions from subsequently earned commissions and not from a sales associate’s base pay; and (3) the chargeback was applied only to the particular sales associate who booked the order. As an independent ground to uphold the chargeback arrangement, the Court noted that even if the payments were “wages,” an employer may withhold or divert them if the two conditions of Labor Code Section 224 are met: the deduction (1) is authorized in writing; and (2) does not reduce the employee’s standard wage. Both conditions were satisfied here.

In light of this case, employers who chargeback advanced commissions from its employees should be mindful that while such arrangements are permissible, they should implement certain policies to ensure that those arrangements will withstand any challenge to their legality. As this case makes clear, employers should, at a minimum, (1) obtain each employee’s written agreement to the chargeback arrangement and have each employee acknowledge, in writing, the compensation agreement/chargeback arrangement; (2) only seek recovery of advanced commissions from future commissions and not from an employee’s base pay; and (3) only apply chargebacks to the employee responsible for generating the sale and not from a group or team of employees.