Employers that use bonus
plans recently won an important victory when the state Supreme Court ruled that
a profit-based bonus incentive plan that deducts for workers’ compensation
costs, cash and merchandise shortages, and other losses is legal. We’ll discuss
the new case and explain how the court’s ruling impacts your compensation
plans.
Profit-Based Bonus Plan
Illegal, Claims Employee
Eddy Prachasaisoradej
was a produce manager for Ralphs Grocery Company, Inc., in
California
plan was illegal. Under the plan, Ralphs paid certain store employees a bonus
based on the individual store’s profitability. Ralphs calculated the profits by
subtracting a store’s operating expenses from store revenues. Operating
expenses included cash shortages, damaged or lost merchandise, workers’ comp,
lawsuits by nonemployees, and other business expenses.
Prachasaisoradej claimed
that these practices violated Labor Code and wage order provisions prohibiting employers
from:
• making employees
contribute to workers’ comp costs
• taking back any part
of an employee’s paid wages
• deducting cash and
merchandise shortages from employee wages where the loss didn’t result from employee
dishonesty or gross negligence A court of appeals agreed, ruling that Ralphs’
bonus plan violated the law.
The HR Management & Compliance Report: How To Comply with California Wage & Hour Law, explains everything you need to know to stay in compliance with the state’s complex and ever-changing rules, laws, and regulations in this area. Coverage on bonuses, meal and rest breaks, overtime, alternative workweeks, final paychecks, and more.
High Court Sides with
Employer
However, the California
Supreme Court has now approved Ralphs’ plan, ruling in a 4-3 decision that an employer
does not violate
wage and hour laws by providing “supplementary compensation designed to reward
employees, over and above their regular wages, if and when their collective
efforts produced a positive financial result for the store where they worked.”1
According to the court,
the Ralphs plan did not create an expectation or entitlement in a specified
wage and then take illegal deductions or contributions from that wage to
reimburse the company for store losses. Instead, employees earned a guaranteed
wage, despite how well or poorly the store performed. Then, if the store made a
profit, employees were eligible to receive the bonus payments, too. Ralphs didn’t
reduce the amount of the bonus after it was determined by taking unauthorized
deductions, contributions, or charges, said the court.
Merely including workers’
comp costs and cash and merchandise losses when determining profitability wasn’t
the same as illegally passing these costs on to employees, the court explained.
Instead, after fully absorbing these expenses and others, Ralphs calculated what
remained as profits—using normal concepts of profitability—to share with
employees as a bonus to their regular wages.
Going Forward
The court has now
eliminated the uncertainty concerning bonus plans that followed the appeals
court decision.
employers may calculate profits and the amount of profit-sharing/bonus payments
in accordance with generally accepted accounting principles without the threat
of liability.
Despite this welcome
news, however, employers must still exercise caution when implementing their bonus
plans. Janie Schulman, a lawyer in the
Angeles
LLP, says that “Employers must craft incentive compensation plans with care.
They should not view this decision as carte blanche to deduct or offset workers’
compensation costs or routine cash shortages, breakages, or equipment losses
directly from salaries, commissions, or bonuses under the guise of ‘profit
sharing.’”
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1 Prachasaisoradej v.
Ralphs Grocery Company, Inc.,
Supreme Court No. S128576, 2007