By Thomas Kaufman; (follow me on Twitter)

Deleon v. Verizon Wireless (Deleon II) is another pro-employer case that is in many ways a carbon copy of Steinhebel v. Los Angeles Times Communications, 126 Cal. App. 4th 696 (2005),  one of my favorite cases (I argued it successfully in the Court of Appeal).  The two cases address the lawfulness of agreements in which employers advance commissions to sales employees when a sale occurs, but the commission is subject to being "charged back" (recouped) if the customer cancels the sale within a certain period of time.

As explained below, Deleon II clarifies earlier precedent and effectively expands the universe of proper chargeback agreements.

The facts

The plaintiff worked as a salesman of wireless phone contracts. Under the compensation plan that he was trained on and required to accept as a condition of employment, he would receive an "advance" when he made a sale of a wireless contract, but if the customer canceled within a year, then the commission would be charged back, meaning that the next advance would be reduced by the amount of the charged back commission. 

These facts are similar to the facts in Steinhebel, which involved a written and signed agreement where the salespeople were advanced a commission for selling a newspaper, subject to a similar chargeback if the customer canceled the subscription within 28 days. The only real differences between the cases are that the chargeback period in Deleon II is considerably longer, and Mr. Deleon did not sign his compensation agreement (although he indisputably was provided a copy and informed that it applies as a condition of employment).


Both DeLeon II and Steinhebel hold that an agreement that an employee will receive advances that are subject to chargeback if future conditions are not met is enforceable as written and does not violate Labor Code Sections 221-223, which are the sections of the Labor Code that render unlawful certain kickback schemes.  In both cases, the key to having an advance vest as an irretrievable "commission" was that the customer not cancel the purchase on which the advance was paid for a certain period of time after the sale was closed. 

The two cases have similar holdings, namely that (1) advances are not treated as vested wages; (2) it is permissible to reconcile an advance that is charged back by reducing future advances accordingly; (3) it doesn’t matter that the employee who made the initial sale did nothing to put him/her "at fault" for the customer canceling the subscription; and (4) the mere fact that it could be characterized as holding employees accountable for "business losses" is insufficient to render the arrangement unconscionable.  

Deleon II goes further than Steinhebel, however, and clarifies some points that Steinhebel arguably left open:

(1) The length of time that the subscription has to be held before the "advance" is vested does not have to be short, but even a one year period is fine.  While the court left open the possibility that a length of time could be so long as to be unconscionable, it rejected that there was a "rule of reason" that the employer had to meet for this to be enforceable: 

"[W]e decline Deleon‟s request to impose a reasonableness standard, or to thrust this court into the paternalistic role of intervening to change contractual terms that the parties have agreed to merely because the court believes the terms are unreasonable.‟

(2) Even where the employee does not sign the compensation plan, the chargebacks are still permissible so long as the employer gives notice that continuing employment is agreement to the compensation plan.  While the employer cannot invoke Labor Code Section 224’s savings clause without a signed writing, a general agreement that commissions will be advances subject to chargeback does not violate Section 221-223, so there is no need to invoke Labor Code Section 224 and no need for a signature.  While a dispute of fact might exist without a signed, written agreement as to whether the parties agreed that commission payments were or were not advances, here the commission plan made it clear by its terms that the payments were advances:

"Here, Deleon received copies of the compensation plans, received training on how the chargeback provision operated, and received commission statements setting forth his commission advances and chargebacks. These undisputed facts objectively establish that Deleon understood that he would be compensated under the terms of the compensation plans."

(3) I have conflated Labor Code Section 221 (which prevents recoupment of wages once paid) and Labor Code Section 223 (precluding paying of a secret wage lower than the wage designated by contract) in that the arguments that plaintiffs raise that a pay practice violates Section 221 are the same as those claiming that the practice violates Section 223.  Steinhebel addressed Section 221, and Deleon II addresses Section 223.  Notably, in addressing Section 223, the Deleon II court notes that, by its terms, a Section 223 claim requires a contract to exist and the employer to secretly pay a lower payment that what is indicated in the contract.  Because the terms of how the system worked were set forth in the compensation plan, they weren’t secret.  If the comp plan wasn’t a contract, then there was no contract.  Either way, Section 223 was not violated.

I think this case continues the trend, which has included such cases as Steinhebel, Koehl v. Verio, and Prachasaisoradej v. Ralphs, holding that an employer and employee can contract when certain payments are "earned," and this can include putting conditions on the earnings of wages that make payments made contingent and subject to reduction for items that are not strictly within the control of the employees. 

For example, we are handling cases in the mortgage industry involving certain "debits" that are calculated into the monthly commission payment for certain business losses that may or may not be caused by employee misconduct.  This case should help the employer in arguing that, as long as the terms of how the "debits" are taken is spelled out in the contract, it is enforceable and not unconscionable.