California Court Holds that Compensation Scheme Permitting Chargebacks Against Monies Advanced Against Unearned Commissions did not Violate State Labor Laws Because Such Commissions were not Wages
Four former employees filed a class action in California state court against internet service provider Verio for violations of California’s labor laws on the grounds that Verio’s compensation scheme – which provided for a base salary, plus commissions that were subject to charge backs under certain conditions – violated California Labor Code § 221 because the commissions were wages. Koehl v. Verio, Inc., ___ Cal.App.4th ___, 48 Cal.Rptr.3d 749, 751 (Cal.App. 2006). “The complaint alleged three causes of action: (1) commission chargebacks in violation of Labor Code sections 221, 223, 225 and 400-410; (2) waiting penalties pursuant to section 203; and (3) unfair competition under Business and Professions Code section 17200 et seq.” Id., at 759 (footnote omitted). Verio cross-complained against the class representatives for commissions recoverable as charge-backs under the compensation scheme, id. The trial court agreed that the commissions were not wages, awarded the employer compensatory damages (for overpayment of unearned commissions) and prejudgment interest totaling more than $250,000, and awarded the employer more than $548,000 in attorney fees. Id., at 759-60. The Court of Appeal affirmed.
Verio’s sales associate employees received base salaries that “remained constant regardless of the number of deals they booked,” plus commissions “for sales that resulted in revenue for Verio.” Koehl, at 752. Once an order was “booked,” Verio would advance payment to the sales associates based on anticipated commissions from those orders. This advance was paid before “verification that the customer was a real company, that the signature was authentic, or that the customer had the financial ability to pay.” Id. Verio would then arrange for installation, and the sales associates served “as a contact point with the customers” to ensure that any problems were resolved. Id., at 753. According to Verio’s written compensation policies, if customers canceled service within 270 days of activation, then Verio was entitled to recover some or all of the commissions advanced in connection with the canceled order. Id., at 753-54. Also, Verio’s written policy expressly advised employees, “Please note that Verio is paying commission in some instances prior to when the commission is actually earned, which does not occur until the service product has been delivered, accepted and payment has been received by Verio.” Id., at 754.
Verio explained that it implemented its commission structure for three reasons: “First, three months of consecutive payment was the industry standard at the time for the payment of commissions. Second, it took approximately six to seven months of recurring revenue for Verio to begin to recover its costs. Third, advancing payment at booking and then requiring three months of recurring revenue created the right incentives for the sales associates to provide follow-up with the customer, to improve the likelihood that the customer would actually pay.” Koehl, at 757. The compensation structure also attracted sales associates because Verio’s competitors would delay paying commissions until the orders created revenue. Id. The trial court ruled in favor of Verio. Plaintiffs’ lawyer appealed separately from the judgment and from the order awarding attorney fees.
On appeal, the court first noted that despite the fact that Verio did not challenge the appealability of the order awarding attorney fees, the order from which the appeal was taken “is clearly a nonappealable order,” and so it dismissed that appeal sua sponte. Koehl, at 760 n.6.
Turning to the merits of the trial court judgment, plaintiffs raised eight arguments on appeal. The Court of Appeal summarized the arguments and its conclusions at page 760 as follows:
Appellants’s opening brief contends that Judge Dondero “erred” in eight particulars, numbered as follows: (1) in finding that Verio’s commission plans did not violate section 221; (2) in finding that Verio’s commission plans were lawful under section 224; (3) in finding the acknowledgment constituted a contract between Verio and its employees; (4) in failing to recognize that consent is not possible because section 219 prohibits and nullifies any agreement contrary to section 221; (5) in applying a “legislative purpose” analysis to a statute that is clear on its face; (6) in finding that the chargebacks were against new advances, not earned commissions; (7) in failing to recognize that, if a contract did exist, it was an unconscionable contract; and (8) in relying upon an unpublished decision in violation of California Rules of Court, rule 977(a).
As we explain, none of Appellants’s contentions has merit. The determination of the fundamental question of the enforceability of Verio’s commission plan disposes of contentions numbered 1, 3, 4, and 6. Contention number 2 is simply wrong. Contentions numbered 5 and 8 could not be ground for reversal. And contention number 7 was not even urged below and, in any event, is groundless.
The appellate court’s analysis therefore focused on the legality of Verio’s chargebacks, which the court concluded did not violate California Labor Code section 221. Koehl, at 760-67. The appellate court also held that Labor Code section 224 provided a separate basis for affirming the judgment. Id., at 767. The Court of Appeal affirmed the judgment “in all respects,” and awarded Verio its attorney fees and costs incurred on appeal. Id., at 770.