Originally published February 15, 2005
Under California law, it is nearly axiomatic that once an employer pays an employee wages, the employer, except under very limited circumstances, cannot offset amounts owed to the employer from an employee’s wages. Employers have toiled with this rule, and have also struggled to determine when, if ever, they can withhold sales commissions from an employee when the employee leaves before the sale is officially consummated, or because the products or services upon which the commission was based were returned after the employer had already paid the employee his or her sales commission.
The Court in Steinhebel v. Los Angeles Times Communications LLC, 205 Cal.App.LEXIS 191 (Cal. Court of Appeal, February 7, 2005) now provides some clarity to these issues. By upholding the commission plan of the Los Angeles Times, the Court held that unfulfilled commission advances are not wages under California law. Thus, in certain circumstances, when an employer, pursuant to a written agreement, pays commission advances to an employee, but the sales upon which the advances were based do not actually materialize, the employer can offset the amount of the advance as against the employee’s future commissions.
The employees at issue executed a fairly straightforward commission agreement with their employer. Under the plan, employees received the minimum wage for their hourly work, and in addition, were eligible for commissions based on the number of subscriptions they sold over the telephone. A commission was not, however, payable until the customer had kept the subscription for at least 28 days. In other words, if the employee sold a customer a subscription, and the customer cancelled it two weeks later, the employee was not entitled to a commission. The employer did not make the employees wait the full 28 days before paying them the commissions. The employer paid the employee the commissions within two weeks of the initial sale as an advance. If the sale was cancelled prior to the 28 day time period contained in the written agreement, the employer would then deduct the amount of the advance already paid from the employee’s next advance. If there was a negative balance, the employer would simply apply that negative balance to any future advances; in no instance was the employee’s minimum wage amounts ever deducted.
The employees asserted that because the employer was deducting previously paid commissions from future commission advances, that the employer was violating California Labor Code section 221, which prevents employers from offsetting, in most cases, amounts against an employee’s wages. The Court disagreed. It held that commission advances are not wages, and thus not subject to the prohibitions contained in section 221.
The Court based its decision upon several factors. First, the Court found that the employees received a minimum hourly wage which was guaranteed. The employer never deducted amounts from these payments. These amounts were wages. Second, the Court found that the employer and the employee had expressly agreed, in writing, that the employee’s commission advances would be subject to deduction for cancelled orders. Third, the Court found that the advances (to which amounts were being deducted) were not wages "because all conditions for performance have not been satisfied." In other words, until the 28 days had passed, the employees were not entitled to receive the commissions. Fourth, the Court, importantly, recognized that even though the employee’s work was done once the initial sale was made, the value of the employee’s service was only realized if the customer kept the subscription for 28 days. Thus, the mere act of the sale did not make the sale a "commissionable order." Since the order was not commissionable, the sales advance was not a wage.
In view of Steinhebel, employers who advance unearned commissions to their employees and wish to recover advances that are not ultimately earned because a sale is cancelled, should consider the following: (1) you should pay your commission employees a fixed minimum hourly wage which is free from deduction; (2) you must have your commission plan in writing; (3) there must be a realistic basis for contending that sales are not complete when you issue the commission advance.
In sum, although California still significantly restricts an employer’s ability to offset amounts against an employee’s wages – even the Steinhebel court recognized that there are some instances when a paid commission cannot be recovered. An employer, after Steinhebel, can legally create a commission plan that utilizes commission advances that are subject to offset as a result of cancelled orders.
The content of this article does not constitute legal advice and should not be relied on in that way. Specific advice should be sought about your specific circumstances.