Employee Chargeback and Clawback in California: Understanding Wage Disputes

An employee chargeback is common in sales jobs. It occurs when an employee receives a commission based on the expected value of a sale that has not yet been completed. If the payment of the commission is contingent upon certain conditions, such as customer retention for a specified period of time, the commission is not considered “earned” wages until those conditions are met.

If the sale falls through or the value is later reduced, the employer may reclaim part or all of the commission paid to the sales employee—this is known as an employee chargeback. A chargeback is typically deemed legal by most courts if explicitly outlined in the employment contract.

Legal Basis for Employee Chargebacks

Although any chargeback against wages is unlawful under California Labor Code Section 221, an employee who receives both wages and sales commissions may agree in writing to a chargeback against commissions for commissions advanced by the employer if the sale later falls through.

As noted in Steinhebel v. Los Angeles Times Communications (2005), an advance is not a wage because all conditions for performance have not been satisfied.

Wage Definition and Payment Requirements

Wages are defined in California Labor Code Section 200 as all amounts paid to employees of any description, whether fixed or calculated based on time, task, piece, commission, or another method. The Labor Code requires prompt payment of all unpaid, earned wages when an employee is discharged, underscoring that wages are not ordinary debts (Schachter v. Citigroup, Inc., 2008). California law also allows employers to have written agreements with employees for the repayment of amounts loaned or advanced, but the entire balance cannot be deducted from the final paycheck.

Clawback Provisions for Sign-On Bonuses

A sign-on bonus, like a commission, may be contingent on meeting certain contractual conditions. These are commonly called clawback provisions, which are often used with signing and retention bonuses, requiring employees to repay the bonus if they leave the company before a specified period.

Clawback provisions are legally permissible because the bonus is not “earned” until the employee fulfills the contractual obligations. However, under California law, the employer cannot withhold the bonus from the employee’s final wages, even if the employee fails to meet the conditions.

Restrictions on Wage Garnishment

California law prohibits creditors, including employers, from garnishing wages, except under certain conditions. This protection extends to debts owed by employees to their employers.

It is also important to note that the law does not support forfeiture in situations where employees were terminated through no fault of their own after substantially performing services that entitled them to a bonus (Schachter v. Citigroup, Inc., 2008).

Contact TONG LAW for Wage Dispute Representation

At TONG LAW, we are experienced at representing employees in wage disputes, including issues related to chargebacks and clawbacks.