Paying employees on a commission basis is a common practice for retail, manufacturing and service industries employers. Until several years ago, California employers were free to make commission arrangements with employees by letter, verbally, or over a handshake. However, effective January 1, 2013, California businesses are required to document all employee commission compensation arrangements in writing or such agreements may be unenforceable. (See Labor Code section 2751 as amended). The new law states:
By January 1, 2013 whenever an employer enters into a contract of employment with an employee for services to be rendered within this state and the contemplated method of payment of the employee involves commissions, the contract shall be in writing and shall set forth the method by which the commissions shall be computed and paid. Labor Codes 2751(a).
The new law will also require employers “to give a signed copy of the contract to every employee who is a party thereto and shall obtain a signed receipt for the contract from each employee.” Labor Code section 2751(b). Court decisions on commission disputes almost exclusively rely on the plain meaning of a commission agreement. Thus, it is crucial that managers evaluate any commission documents provided to employees and be certain they contain clear, unambiguous terms and conditions.
In July, 2012 Verizon Wireless was able to defeat a class action lawsuit due to its properly drafted commission plan with its California sales representatives. Verizon’s written plan established that after a guaranteed minimum base pay, sales representatives received advance payments of their anticipated commissions which were not actually earned until the expiration of a chargeback period during which customers had the right to cancel the service. The plan specified that deductions could be made from the advanced amounts (if services were cancelled) to calculate the final earnings paid during a pay period. A Verizon sales representative challenged the company’s written advance payment and chargeback plans, claiming the plans constituted a “secret underpayment of wages” under Labor Code section 223. The sales rep sought to represent a class of employees and seek civil penalties under the Labor Code Private Attorneys General Act of 2004.
The sales rep contended the initial payment of commission monies should be regarded as earned wages (not advances) making the later deductions improper under the Labor Code. The Court ruled in favor of Verizon noting that its written plans were clear and unambiguous that monies paid up front “were advances, not wages, and the chargeback provision did not violate the Labor Code because Verizon Wireless may legally advance commission payments to its retail sales representatives before completion of all conditions for payment, and charge back any excess advance over commissions earned against future advances should the conditions not be satisfied.” See Deleon v. Verizon Wireless. The Court rejected the sales rep’s argument that he and others did not understand the chargeback provisions of the commission plan, noting that the reps received copies of the well-drafted compensation plans, received training on how the chargeback provision operated, and received commission statements setting forth commission advances and chargebacks.
This case provides a good example of how proper drafting and implementation of a commission agreement can save the day in contentious litigation. If you or your company needs assistance with agreement drafting, please contact an attorney at Cook Brown, LLP.
