Koehl v. Verio, Inc.

• Decision Date: 13 September 2006
• Docket Number: No. A108972.,No. A110110.,No. A110447.,A108972.,A110110.,A110447.
• Citation: 48 Cal.Rptr.3d 749,142 Cal.App.4th 1313
• Court: California Court of Appeals Court of Appeals
• Parties: Jeffrey KOEHL et al., Plaintiffs and Appellants, v. VERIO, INC. et al., Defendants and Respondents.

48 Cal.Rptr.3d 749

142 Cal.App.4th 1313

Jeffrey KOEHL et al., Plaintiffs and Appellants, v. VERIO, INC. et al., Defendants and Respondents.

No. A108972.

No. A110110.

No. A110447.

Court of Appeal, First District, Division 2.

September 13, 2006.

Certified for Partial Publication.^*

Thierman Law Firm, Mark R. Thierman; Hoffman & Lazear, H. Tim Hoffman and Arthur Lazear, Attorney for Plaintiffs and Appellants.

Hale Friesen, Shannon M. Henderson, Attorneys for Defendants and Respondents.

Daniel E. Friesen, pro hac vice.

RICHMAN, J.

Appellants are Jeffrey Koehl, Wendy Lingo, Terrence McCarthy, and John Brehm (when referred to collectively, Appellants), former sales associates at respondent Verio, Inc. (Verio). Appellants's compensation plans provided for base pay and commissions, which commissions were paid when an order was booked, but which Verio could recover, or charge back, if certain conditions were not met. The fundamental question presented by this appeal is whether the commissions were wages, thus making the chargebacks unlawful under section 221 of the Labor Code. The trial court concluded that the commissions were not wages, and entered judgment for Verio. Our review leads to the same conclusion, and we affirm.

I. Factual Background¹

A. The Parties

Verio is an Internet service provider that sells Internet access and web hosting services. Its Internet access customers are predominantly businesses with high volume Internet needs that generally require the purchase and installation of equipment and hardware in order to obtain ongoing Internet access through fiber optic lines. In 2000, Verio was purchased by Nippon Telephone and Telegraph Corporation (NTT) and began doing business as NTT/Verio.

Appellants worked primarily as sales associates² for Verio between 1999 and 2002. Lingo began her employment in February 1999 as a sales associate and was a major sales associate when she left in May or June 2002. Brehm was a sales associate from July 2000 to September 2002. Koehl was employed from February 1999 to April 2002, first as a sales associate and later in key accounts development, which was, as he described it, "a program set up [where] they basically picked the top 10 or 14 reps in the county, started a new sales division that the main goal was to go out and hunt for Fortune 500, Fortune 1,000, and any logo-type business." McCarthy, the only named plaintiff who did not testify at trial, was a sales associate from March 1999 until June 2001.

Sales associates earned base salaries, described as their "standard wage" or "base pay," of between $40,000 and $70,000 per year; this amount remained constant regardless of the number of deals they booked. In other words, sales associates earned their base salaries for performing their basic job duties as employees of Verio, and received that base salary every month regardless of whether they booked any business. In addition to their base salaries, sales associates also earned commissions on sales pursuant to a series of compensation plans described in detail below. They earned commissions for their results, i.e., for sales that resulted in revenue for Verio.

B. The Sales Process

The duties of the sales associates involved typical sales functions, described by Verio as "identifying customers, building relationships, attempting to sell Internet service, booking deals, following up with customers to finalize sales, and serving as a point of contact for billing and service questions after a sale." When a sales associate obtained an order, he or she would submit to the provisioning department a service order form, a two-page form consisting of the customer's name, contact information, services being ordered, and terms of the agreement. At this point the order was "booked" and the sales associate received an advance payment for the anticipated commission, without verification that the customer was a real company, that the signature was authentic, or that the customer had the financial ability to pay. In short, booking the order did not include an assessment of the quality of the business, but was an administrative step to make certain that the order form was complete. Manager approval of an order was not required unless the order deviated from Verio's standard terms. After an order was booked, the provisioning department called the customer to arrange for installation.

C. Responsibilities After Booking

Although the provisioning department was directly responsible for making sure that service was installed, the sales associates also had significant ongoing responsibilities with customers after an order was booked. They acted as a contact point with the customers, directed them to others within Verio on technical and billing issues, and served as problem solvers, all to the end of making sure that the orders were installed—and billing could begin. As Lingo explained it, she acted as the contact person if a customer encountered any problems, directing the customer to the appropriate department, such as Customer Service or Billing and Collections, for corrective action. She had constant contact with customers to ensure that their system was up and running, playing a key role in maintaining the customer's happiness, which made them more likely to pay. The testimony of Brehm and Koehl was similar, as shown by that of Brehm:

"Q: After you booked a deal and you were advanced the commission, it was part of your job, was it not, to make sure that the customer was happy after booking?

"A: Correct.

"Q: And so that they would install the business after booking it; correct?

"A: Yes.

"Q: And that they would actually start making the payments; correct?

"A: Yes.

"Q: You would do whatever you could to resolve any customer problems?

"A: Correct.

"Q: And that was part of your job, to stay in touch, resolve problems, make sure the business started paying; correct?

"A: Correct.

"Q: All that's after the booking; right?

"A: Correct."

D. The Compensation Plans

Central to the issues in this case were the compensation plans, typically called the "Sales Associate Compensation Plan," which governed the manner in which sales associates were paid by Verio. And more specifically central were the portions of the plans concerning commissions and chargebacks, which are set forth in detail here for the years 1999 to 2002.

1. The "1999 Sales Compensation Plan"

The "1999 Sales Compensation Plan" contained a section entitled "Monthly Revenue Commissions" (section 2.6) that explained the calculation of commissions due sales associates: "This incentive, compensation components are calculated based on the total amount of recurring revenue booked for the accounting month. [¶] . . . [¶] Commission: 50% of the eligible commission will be paid on the last pay period of the next month after the sale booking, with the balance due upon installation of the customer circuit (assumed to occur no later than the last pay period of the second month after sale booking). Commissions for bookings with expected installation date of 60 days or longer from the booking date will be paid 50% at circuit order and 50% at installation."

Pertinent to the chargebacks at issue here, section 3.6 of the 1999 plan, "Account Cancellation Charge Back," provided as follows:

"VERIO, Inc.'s Sales management has the right to impose a charge back on all accounts canceled with 270 days of activation.

"The charge back will be:

                  "Prior to billing to 60 days after  100% charge back
                  60-180 days after billing            75% charge back
                

"Charge backs will be treated as a reduction in revenue credit in the month following the account cancellation."

2. The "2000 Direct Sales Compensation Plan"

The "2000 Direct Sales Compensation Plan" provided, in section 2.5 on "Commissions," that if [a sales associate] met 50% of his or her quota, the commission would be between 50% and 100% of the Monthly Recurring Revenue, defined in section 2.2 as "the amount agreed to be paid by the customer per month for the particular service desired . . . ." It further provided, as to "When Commissions are Paid: [¶] Verio has two paydays per month; the first is the 15th, and the second is the last day of the month. If the installation is expected to occur within 60 days after the Order is booked, the full commission will be paid on the second payday of the month following the month the Order was booked. If the installation is scheduled or contracted to occur more than 60 days after the Order is booked, 50% of the commission will be paid on the second payday of the month following the month the order was booked and the remaining 50% of the commission will be paid on the next payday following the installation date. A supervisor has the discretion to require that a commission not be paid until installation in those circumstances that require a supervisor's approval before allowing the sale to be made (a low margin sale, a significant discount given, etc.). Please note that Verio is paying commission in some instances prior to when the commission is actually earned, which does not occur until the service or product has been delivered, accepted and payment has been received by Verio."

The plan provided in section 3.6, "Account Cancellation: [¶] Verio's management has the right to seek reimbursement for any commission paid for any account canceled prior to billing and up to 90 days after activation of the service. The reimbursement will come out of the [sales associate's] commission in the month following the account cancellation."

3. The "2001 Sales Associate Compensation Plans"

The record contains two different compensation plans for 2001.³ In the "2001 Sales Associate Compensation Plan" dated January 1, 2001, section 3.5 on "Commissions" provided: "A commission is defined as the percentage amount of Monthly Recurring Revenue and Monthly Non-Recurring Revenue that the [sales associate] is entitled to receive. The percentage amount of...