This month’s expert is
Mary L. Topliff, principal of the Law Offices of Mary L. Topliff in
in employment law counseling, training, and compliance.
Paying bonuses may seem
like an area in which employers have a lot of discretion. After all, shouldn’t
an organization be able to unilaterally decide which elements to include in
calculating bonuses? Yet, as I’ll explain, employers are well advised to
proceed with caution, especially as bonus plans have recently caught the
attention of the California Supreme Court and the Legislature.
Bonus Issue Before High
Court
The state’s high court
has agreed to decide whether a bonus plan based on a profit figure that is
reduced by expenses—including the cost of workers’ compensation insurance and
cash and inventory losses—violates various California Labor Code provisions and
the state’s unfair business practices law.
Formulas and computations
can greatly assist an organization in determining a total bonus amount. They
also make it easier to explain to employees how bonuses were derived,
eliminating suspicions of unfairness, inequity, or discrimination. However,
bonuses and commissions are wages paid to employees and, as such, subject to
regulation.
For example, Labor Code
Section 3751(a) prohibits an employer from deducting from employee earnings, either
directly or indirectly, to cover any part of the cost of workers’ compensation
insurance.
Further, Labor Code
Section 221 bars employers from making deductions from wages unless legally required
to do so (e.g., for taxes) or specifically authorized by employees (e.g., for
group benefit premiums). And, the Industrial Welfare Commission wage orders
prohibit deductions from nonexempt employee wages for cash shortages,
breakages, or loss of equipment unless caused by an employee’s dishonest or willful
act or gross negligence.
In the case pending stated a viable claim that the bonus plan, which was based on profits that
before the California Supreme Court, a lower court found that the employees had
included a calculation of the costs of workers’ compensation and other business
losses, violated these Labor Code provisions. The employer, Ralphs Grocery Co.,
had argued unsuccessfully that bonuses based on profits and losses do not constitute
unlawful deductions. The Supreme Court will resolve this dispute, but it is
unclear how—or when—the court will rule.
Legislature to Step In?
In what appeared to be a
preemptive strike on the issue, the California Assembly proposed a bill (A.B. 2095)
that would have authorized a discretionary bonus to be based on profits
calculated according to generally accepted accounting principles, which would have
permitted the methods used by Ralphs. However, this language was deleted from
the bill in an April 2006 amendment. The Legislature often enacts legislation designed
to counteract court rulings, so expect to see another proposed bill in 2007 on
this subject.
Join us this fall in San Francisco for the California Employment Law Update conference, a 3-day event that will teach you everything you need to know about new laws and regulations, and your compliance obligations, for the year ahead—it’s one-stop shopping at its best.
Bonus Guidelines
Until these issues are
sorted out, assume that this type of bonus plan will not pass muster. Here are some
tips to help you figure your bonus scheme—and note that these same
considerations also apply to commissions:
1. Consider and define
the purpose of the bonus. Is it a supplement to base compensation? Is it a reward for
good work on an individual or companywide basis? Is it to provide an incentive
to minimize shortages and losses? Don’t include any items in how you calculate
the bonus that directly or indirectly result in unlawful deductions from
earnings.
2. Define how and when
the bonus is earned. In some cases, this is a straightforward issue, particularly when
it is based on a sale and payment is made in a lump sum. In that case, the
bonus may be earned at the time payment is received from the customer. In other
instances, the sale may involve ongoing services to a client who pays at
different intervals. Different employees may be involved in the initial sale to
the client and the subsequent services. Thus, the plan must address when the
bonus is earned for each of these employees. Further, identify if the employee
must be actively employed at the time of the bonus payout. For example, the
bonus may not be earned until the customer’s check has cleared the bank. Or,
the bonus is not earned until such time as the bonus plan is funded (e.g., at
the end of the year or quarter).
3. Define employee
eligibility factors. It is important to be clear about the employees who are eligible
to earn the bonus. For example, must the employee be employed for a period of
time before becoming eligible?
4. Define how employees
on leaves of absence will be handled. The Family and Medical Leave Act and California
Family Rights Act prohibit employers from “punishing” employees for exercising
their rights under these laws. Thus, if an employer pays an attendance bonus,
the days an employee is absent for protected family and medical leave cannot be
counted against the employee for this purpose. Be sure to examine the elements
of any bonus plan to determine if attendance is a factor.