An employee whose wages are based in part on commissions may face a situation where he is being terminated or laid off, shortly after a transaction (or a number of transactions) that result in earning his commissions take place and before he is paid or where the transaction falls through after he earns his commissions but before he is paid. At that point, the employer may refuse to pay the employee commissions due and argue that the subject employee is not entitled to those commissions.
Although, the law is not fully clear on the issue of when the employer has the right to withhold commissions, the are certain useful guidelines that the courts have prescribed in the decided cases. In one leading case on the issue of chargebacks against commissions - Harris v. Investor's Business Daily, Inc. 138 Cal.App.4th 28 (2006) - the Second District deal with the issue of withheld commissions. In that case, the employer argued that the company was entitled to withholding commissions because they constituted "advance" to the telemarketers whose job was to sell monthly newspaper subscriptions, because the subscribers had the right to terminate the subscription after signing up, and thus, the company believed, the loss of the business should have been carried on to the employees in charge of obtaining that business.
The court has rejected the above argument. The court started its analysis by noting the fundamental presumption that the employer shall not take any wages back from the employer after they are earned. Cal. Labor Code section 221. Wages are defined broadly to include all amount for labor performed by employees of every description, whether the amount is fixed or ascertained by the standard time, task, piece, commission basis, or other method of calculation. Cal. Labor Code section 200. The court further held that in order to chargebacks to be legal in that case, (a) the commissions must be specifically identified as "advance" in the company's stated policy or compensation agreement. In addition, (2) the employees must expressly agree to the chargeback policy in writing.
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