America Online Inc., the world's largest Internet service provider, will pay $1.25 million in penalties and costs and reform some of its customer-service practices to settle an investigation by New York Attorney General Eliot Spitzer's office.

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ALBANY, N.Y. — America Online Inc., the world’s largest Internet service provider, will pay $1.25 million in penalties and costs and reform some of its customer-service practices to settle an investigation by New York Attorney General Eliot Spitzer’s office.

Around 300 consumers had filed complaints with Spitzer’s office accusing AOL, a wholly owned subsidiary of Time Warner Inc., of ignoring demands to cancel service and stop billing.

The company, with 21 million subscribers nationally, rewarded employees who were able to retain subscribers who called to cancel their Internet service. For years, AOL had minimum retention or “save” percentages that customer-service personnel were expected to meet, investigators said.

The employees could earn tens of thousands of dollars in bonuses if they were able to dissuade half of their callers from ending service.

That led many employees to make it difficult for consumers to cancel service or simply ignore such requests, Spitzer spokesman Brad Maione said.

As part of the settlement, Dulles, Va.-based AOL agreed to eliminate any requirements that its customer service representatives maintain a minimum number of “saves” in order to earn a bonus and record all service cancellation requests and verify the cancellation through a third-party monitor.

AOL, which cooperated with Spitzer’s office, did not admit to any wrongdoing in the settlement.

The company also agreed to provide up to four months of refunds to all New York consumers who claim their cancellation requests were ignored. AOL has 1.9 million subscribers in New York.

New York consumers seeking refunds can obtain a claim form from the attorney general’s Web site.

“AOL is pleased to have reached an agreement with the state of New York on customer care practices that will increase quality assurance, and assist with the verification of certain member intentions online,” said AOL spokesman Nicholas Graham.