Employers May Backcharge Payroll For Prior Commissions Paid If Conditions Are Never Met

It has long been the law in California that an employer may not set off debts an employee owes the employer against wages due to that employee. See Barnhill v. Robert Saunders & Co. (1981) 125 Cal.App.3d 1, 6 (employer may not deduct from employee's final paycheck payments on debt employee owed to employer); Phillips v. Gemini Moving Specialists (1998) 63 Cal.App.4th 563, 572.

There are, of course, exceptions. These include: state and federal income taxes, social security taxes, and state disability insurance taxes; wage garnishments; deductions that may authorize in advance in writing, including insurance premiums, pension or retirement plans funding; voluntary deductions on wage assignments (Labor Code § 300); and certain costs of board, lodging or other "facilities" furnished to employees in addition to their wages.

These protections inure to the benefit of almost all employees. But what about telemarketers? Does anyone really care if the paychecks of a telemarketers are protected? In a recent published opinion issued by the Second District Court of Appeal, the answer was "no."

In Steinhebel v. Los Angeles Times Communications, LLC ( --- Cal.App.4th ---, Feb. 7, 2005) the court of appeal held an employer may legally "advance" commissions before the completion of all conditions for payment and, by agreement, may charge back those advances against future commissions if the conditions are never satisfied. Telephone solicitors for the L.A. Times worked under a policy that immediately paid them a commission upon the sale of a subscription, subject to a chargeback if the customer did not keep the subscription for at least 28 days. The employees sued, claiming that the policy ran afoul of sections 203 (waiting time penalties), 221 (collection or receipt of wages previously paid), 223 (secret payment of wage lower than designated scale), 225 (unlawful receipt or withholding of wages and secret payment of wage below scale) and 400 through 410 (restrictions on employee bonds, “the Employee’s Bond Law”) of the Labor Code, as well as the unfair, fraudulent or unlawful business practice prohibitions under Business and Professions Code § 17200.

The trial court disagreed, granting a summary judgment motion in favor of the employer. The court of appeal reviewed the ruling de novo and agreed with the trial court. The wages were never "earned" because the conditions were not met until a subscription continued for 28 days. And the deduction was not a violation of Labor Code § 221 because of a written agreement between the employees and the Times which provided:

“However, if the subscription is rejected by The Times [an “in-house kill”] or by the customer before 28 days, the amount advanced in respect to the rejected subscription will be deducted from your compensation payable subsequent to the date of such rejection based on your commission rate for [the] current week and you hereby authorize such deductions.”

The agreement made the defense. Citing Korry of California v. Lefkowitz (1955) 131 Cal.App.2d 389, 393 [allowing recovery of excess of advances over earned commissions where agreement specifically provided employee would have weekly advance that would be charged against his commissions]; and Agnew v. Cameron (1967) 247 Cal.App.2d 619, 622, 624 [“it is clearly the law in California that a salesman is required to repay the excess of advances made over commissions earned when there is an express agreement on the part of the salesman to repay such excess”; “when there is an express or implied promise by the salesman to repay excess advances to his principal, the salesman is obliged to repay the surplus ‘draws’”], the court of appeal found the arrangement fair and lawful. Consequently, the unfair competition claims under the Business & Professions Code failed as well.

"While an employer’s policy or practice that violates the Labor Code may also be held an “unlawful business practice” under Business and Professions Code section 17200 et seq. (see Hudgins, supra, 34 Cal.App.4th at p. 1126), where, as here, an employer’s policy is lawful and permissible, there is no basis for relief under the unfair competition law. (See Olszewski v. Scripps Health (2003) 30 Cal.4th 798, 827-830.)"

The full opinion can be viewed or saved here as a word document or in pdf format.

Comments

[JC]

Maybe I missed something, but I think someone misread this case. Under these facts, the only alternative open to the employer would be to delay payment of commissions until the sale "stuck" 28 days after the fact (something the Times would have been able to do). In that scenario, I could see salespeople having an issue with having to wait after a particularly good month (or after their first month) to receive a big check.

As I read the case, the employer clearly notified all new salespeople of the practice. Isn't it common for California employers to advance commissions in the form of "draws" and later be able to reconcile them?

Sorry, I don't see how this is out of line with prior California practice.

[M Walsh]

We didn't see the case as being "out of line with prior California practice," either. Aside from our "nobody loves the telemarketers" reference [is it the law that lawyers can't at least try to have a sense of humor?], we didn't mean to imply otherwise. The opinion made it very clear that "the agreement made the defense." This was not a radical departure of law. Rather, the court found that the agreement was enforceable because it is governed by existing law, namely, Korry of California and Agnew. ("When there is an express or implied promise by the salesman to repay excess advances to his principal, the salesman is obliged to repay the surplus ‘draws.’") The case is only new and exciting, or, at least, publishable, because it adds to the existing body of law a fact pattern and set of labels that is common, but which differs slightly from those of the prior published cases.

[JC]

Fair enough. Keep up the good work - I enjoy visiting the site. Lots of interesting material.

[Toby Harris]

There is a very serious problem with this errant ruling. Nobody seems to remember why theses labor codes were structured, to prevent employers from creating creditor/debtor relationships in employment agreements; and to avoid "company towns" or peonage which occured in the early part of last century.

Labor code 221 was put in place to prevent employers from taking back monies from employees to prevent peonage, or contractual enslavement. The purpose of a job is for upward mobility, not debt servicing of normal corporate business loses that the employee has no responsibility for.

This ruling sets back labor law 100 years, as employers are now allowed by the State of California to drive employees into enforceable chargeback labor debts that they have to pay off in future pay periods. This happening with the labor codes prohibiting it. Labor code 219a, 221, 224 prevents rebate of wages and setting aside these rights by contractual agreement.

This is the problem with courts throwing politics and opinion into the court decisions when the courts really need to see what citizen laws and rights are being trampled. The California Appeals court has effectively wiped its ass with the 13th amendment in this opinion and hopes that nobody will notice. We noticed, and vow a supreme court appeal of this pro-corporate opinion.

[Toby Harris]

There is a very serious problem with this errant ruling. Nobody seems to remember why theses labor codes were structured, to prevent employers from creating creditor/debtor relationships in employment agreements; and to avoid "company towns" or peonage which occured in the early part of last century.

Labor code 221 was put in place to prevent employers from taking back monies from employees to prevent peonage, or contractual enslavement. The purpose of a job is for upward mobility, not debt servicing of normal corporate business loses that the employee has no responsibility for.

This ruling sets back labor law 100 years, as employers are now allowed by the State of California to drive employees into enforceable chargeback labor debts that they have to pay off in future pay periods. This happening with the labor codes prohibiting it. Labor code 219a, 221, 224 prevents rebate of wages and setting aside these rights by contractual agreement.

This is the problem with courts throwing politics and opinion into the court decisions when the courts really need to see what citizen laws and rights are being trampled. The California Appeals court has effectively wiped its ass with the 13th amendment in this opinion and hopes that nobody will notice. We noticed, and vow a supreme court appeal of this pro-corporate opinion.

[TOBY HARRIS]

TV SHOW 60 Minutes has requested information on this case be sent to the editorial staff for review 3/4/05 for possible civil rights interests.

This request is being fufilled.

[Toby Harris]

Chargeback legislation to be heard by the California State Assembly 4/20/05:
Assembly Bill 1172 (AB 1172)

http://www.aroundthecapitol.com/bills/leginfo.public.ca.gov/pub/bill/asm/ab_1151-1200/ab_1172_bill_20050407_amended_asm.html?billtype=ab&billnumber=1172

[Toby Harris]

Chargeback legislation to be heard by the California State Assembly 4/20/05:
Assembly Bill 1172 (AB 1172)

http://www.aroundthecapitol.com/bills/leginfo.public.ca.gov/pub/bill/asm/ab_1151-1200/ab_1172_bill_20050407_amended_asm.html?billtype=ab&billnumber=1172

[Toby Harris]

AB1172 was passed by the California State Assembly (4/20/05) and is now heading for appropriations. The California Newspaper Association has backed away from thier obsinate position on chargebacks, and may even be willing to compromise with employees. For up to date information on Assembly Bill 1172:
chargebackconsultant.com

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[Zmajryq]

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