30 Litigating CA Wage & Hour Class and PAGA Actions (23rd Edition) Seyfarth Shaw LLP | www.seyfarth.com In particular, plaintiffs have attempted to derive a “no-chargebacks” rule from Hudgins v. Neiman Marcus,148 a case involving commission chargebacks for retail sales employees on certain returns of merchandise. Plaintiffs read the case as generally prohibiting chargebacks where the employee was not at fault for the return. Defendants respond that the case’s holding is more limited, addressing only the situation where Neiman Marcus held its employees collectively responsible for the return of any item that could not be traced back to the particular salesperson who sold it. The court never suggested that charging back the commission was unlawful where the sale can, in fact, be traced back to the person who received the commission and only that employee is subject to the chargeback of the previously paid commission on that sale when the item is returned. In fact, the state Division of Labor Standards Enforcement (“DLSE”) has construed Hudgins as approving a commission chargeback for such an identified return.149 Moreover, multiple cases have since echoed that interpretation of Hudgins.150 As discussed below, guidelines have now emerged that allow employers to craft compensation systems that include a chargeback element without running afoul of California law. 2. Steinhebel Approves Certain Chargeback Plans In Steinhebel v. Los Angeles Times Communications, LLC,151 the Court of Appeal rejected the broad reading of Section 221 that the plaintiffs advanced. Steinhebel expressly held that California’s various “anti-deduction” provisions do not preclude an employer from advancing a commission to an employee subject to chargeback if a condition for “earning” the chargeback is not satisfied. More specifically, Steinhebel upheld a pay system that advanced newspaper telesales employees a commission the day they sold a newspaper subscription, but under which the subscription was not “earned” until the customer kept the subscription for twenty-eight days without canceling. If the customer canceled sooner for any reason, then the commission was “charged back” by being deducted from the employee’s next commission advance. Steinhebel held that the contract was consistent with the Labor Code and public policy because the contract plainly provided that the commission was not earned until the customer kept the subscription for twenty-eight days without canceling, and the overall pay system inured to the benefit of the employees by allowing them to be paid sooner than the “earning” date.152 Indeed, given the widespread nature of commission chargeback systems, Steinhebel was reluctant to declare such a system illegal without some express language in the Labor Code requiring such a result: Compensating employees in part with advances on commissions is a longstanding practice. No prior case has held the practice to violate the California Labor Code, and we are pointed to no statute that expressly 148 34 Cal. App. 4th 1109 (1995). 149 DLSE Opinion Letter 1999.01.09. The DLSE has also opined that chargebacks of commissions are acceptable when a customer fails to pay for an item so long as the sales commission agreement makes clear that the commission is not earned until payment is received. DLSE Opinion Letter 1999.01.09 (“A commission is ‘earned’ when the employee has perfected the right to payment; that is, when all of the legal conditions precedent have been met. Such conditions precedent are a matter of contract between the employer and the employee, subject to various limitations imposed by common law or statute.”); see also DLSE Opinion Letter 2002.12.09-2 (“Commissions are earned only after the reasonable conditions precedent of the employment agreement have been met and commissions can be calculated.”). 150 See Steinhebel v. Los Angeles Times Comm’ns., LLC, 126 Cal. App. 4th 696, 711 (2005); Harris v. Investor’s Bus. Daily, 138 Cal. App. 4th 28, 41, modified, 138 Cal. App. 4th 871 (2006) (discussed below, each interpreting Hudgins as allowing chargebacks for identified returns). 151 126 Cal. App. 4th 696 (2005). 152 Id. at 708-09.
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