Charge back of commissions in “bill validation” provision

An opinion of the Kentucky Court of Appeals rendered September 14, 2007, rules in favor of AT&T on enforcing charge back of commissions based on a “bill validation” provision in the agreement with the sales reps. In AT&T Corp. v. Fowler et al., (2006-CA-000402-MR, 2006-CA-000535-MR)(to be published), Mr. Fowler worked for AT&T selling high speed data services and Mr. Grant was a specialist and consultant earning commissions derivatively from Mr. Fowler’s sales. Part of the compensation agreement governing Mr. Fowler’s employment stated:

Under circumstances listed below, a Sales Associate may be debited for a sale that has been credited to them. This may be accomplished through debiting future commissions or the issuance of a certified personal check to AT&T by the sales associate. . . . .
All services must remain installed, billing and maintain an acceptable payment history (including meeting commitments) for 12 months. If all or part of the service comprising a sale is discontinued before that time, a Sales Associate will be debited.

Fowler earned $100,000.00 in commissions on sales to Darwin Networks, Inc. which began having financial problems and eventually declared bankruptcy. Darwin’s financial problems resulted in not maintaing an “acceptable payment history” for the required 12 month period. Subsequently, AT&T charged back the lion’s share of Fowler’s commissions as set-offs of future commissions. Fowler and grant challenged the charge back as a violation of KRS 337.060 prohibiting companies from recovering losses from their employees’ wages.

Fowler and Grant lost at the administrative level. The Commissioner of the Department of Labor disappointed Fowler and Grant by ruling that the charge backs were allowed because the commissions were contingent “wages” subject to a certain income stream from the sales. Franklin Circuit court agreed with the Commissioner that the commissions were wages, but disappointed AT&T by ruling that the charge backs were unlawfule under KRS 337.060(2)(e).

The appeal followed where AT&T argued that the commissions were advances and not earned wages. The Court of Appeals deemed this argument to be just plain silly, but AT&T prevailed anyway because the language of the statute refers to wages that were “agreed upon”. The purpose of the statute, says the Court of Appeals, is to prevent employees from losing wages that were agreed to be paid by the employer. Here, the agreement to charge backs were expressly agreed to in the compensation plan.

Lesson to be learned by employers: write good clear contracts regarding compensation. Lesson learned by employees: read the contracts to avoid surprises and be sure your time and effort is worth what is agreed upon. Both parties can benefit from investing a small amount of money in the beginning to have an independent attorney review and clarify any employment agreement.