Litigating California Wage & Hour and Labor Code Class Actions

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
bars such a practice. In view of its widespread nature, we are loathe to
hold the Labor Code bars such a practice by implication. 75
3. Further Development of the Law Since Steinhebel
Steinhebel remains good law, and an employer setting up a chargeback system may
use the Steinhebel system as a safe template. It is important to note, however, that
Steinhebel involved ideal facts for the defendant: the chargeback agreement was in a
writing signed by the employees; the agreement referred to the initial payment as an
“advance”; the conditions to earn the commissions were spelled out in the
compensation plan; and those conditions did not seem particularly onerous. But
what if some of the ideal elements are missing?
The first word on chargebacks following Steinhebel suggested that if an employer did
not document the chargeback agreement properly, it could violate California law. In
Harris v. Investor’s Business Daily, 76 another panel of the Second District Court of
Appeal held that the lack of a written chargeback agreement precluded summary
judgment for the employer. As in Steinhebel, the plaintiffs sold newspaper
subscriptions, and the money they initially received was subject to chargeback if the
customer canceled the subscription without holding it a certain period of time. Unlike
Steinhebel, however, there was no written agreement that described the initial
payment as an advance or otherwise suggested that it was not “earned” upon the
completion of the sale. Given that the plaintiffs testified that they understood they
earned the money when their sale was completed, the court held that there was a
triable issue of fact whether the chargeback system violated Labor Code Section
221. 77
Later, the First District Court of Appeal issued a far more favorable chargeback
opinion in Koehl v. Verio, Inc., 78 a case involving chargebacks against salespersons
who sold internet services. As in Steinhebel, the chargeback plan in Koehl was in a
75
76
77
78
Id. at 709.
138 Cal. App. 4th 28, modified, 138 Cal. App. 4th 871 (2006).
Id. at 41.
142 Cal. App. 4th 1313 (2006).
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