In an important victory for employers that use bonus plans, the California Supreme Court has approved a retailer’s profit-based incentive plan that made deductions for a store’s workers’ compensation costs, cash and merchandise shortages, and other losses. In so ruling, the high court dismissed employee concerns that the plan violated various California wage and hour rules. We’ll examine the new case and what it means for your pay practices.
Bonus Based on Profit Challenged
Ralphs Grocery Company, Inc., maintained an incentive compensation plan that paid certain store employees a bonus—over and above their regular wages—based on the store’s profits. Profits were determined 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.
Eddy Prachasaisoradej, a produce manager at Ralphs, filed a class action lawsuit challenging the bonus plan. He claimed the grocer violated various Labor Code and wage order provisions that prohibit employers from charging workers’ comp costs to employees, taking back any part of an employee’s paid wages, and deducting cash and merchandise shortages from wages where the loss isn’t because of employee dishonesty or gross negligence. A court of appeals agreed that the bonus plan was illegal (see CEA December 2003).
Plan Upheld
But now, in a 4-3 decision, the California Supreme Court has upheld Ralphs’ plan, ruling that an employer does not violate “California wage-protection laws by providing, as Ralphs did, 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
The court explained that the plan did not create an expectation or entitlement for a specified wage and then take illegal deductions or contributions from that wage to reimburse Ralphs for store losses. Instead, employees received a guaranteed wage regardless of the store’s performance. Then, employees were eligible to receive bonus payments if the store was profitable. The court emphasized that once the amount of the bonus was determined, Ralphs didn’t reduce it by taking unauthorized deductions, contributions, or charges.
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The court went on to say that merely including workers’ compensation costs and cash and merchandise losses in the measure of profitability wasn’t the same as illegally passing these costs on to employees. Rather, after fully absorbing these expenses and others, Ralphs simply determined what remained as profits—using normal profitability concepts—to share with employees in addition to their regular wages.
Impact of Ruling
This new decision is a welcome one for employers, following several years of uncertainty in the wake of the appeals court ruling over the legality of bonus plans like the one Ralphs used. Because of this development, California employers may calculate profits and the amount of profit-sharing/bonus payments in accordance with generally accepted accounting principles without the threat of liability.
However, there remain certain limits that employers must consider. Janie Schulman, an employment law partner at the Los Angeles office of the law firm Morrison & Foerster 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.’”
1 Prachasaisoradej v. Ralphs Grocery Company, Inc., Calif. Supreme Court No. S128576, 2007