In calculating profit-based bonuses for certain store employees, Ralph’s Grocery Co. subtracts the store’s workers’ compensation costs as well as cash and merchandise shortages. David Swanson, a former Ralph’s store manager in Southern California, filed a class action lawsuit on behalf of himself and other employees challenging these bonus deductions. He claimed the grocer violated various Labor Code and wage order provisions that prohibit employers from charging workers’ comp costs to employees and from deducting cash and merchandise shortages from employee wages.
Now, in a controversial new ruling that looks at what you can and can’t deduct from an employee’s wages, a California appeal court has ruled Swanson’s case can proceed. We’ll look at the decision and what it means for your pay practices.
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Is Exempt Status the Key?
The court of appeal explained that the laws prohibiting certain deductions from employee wages also apply to bonuses. Consequently, it’s illegal for a bonus plan to deduct expenses that may not legally be charged to an employee’including any part of the cost of workers’ compensation claims.The court, however, found that deductions taken from bonuses for cash shortages are prohibited only when they are taken from the pay of nonexempt employees. Therefore, to the extent Ralph’s bonus plan applies to exempt managers, the court said the deduction for cash and merchandise shortages is legal. To the extent it applies to nonexempt employees, the deduction is illegal.The court also clarified that, except for deductions specifically barred by law, a bonus calculation may consider other expense items that aren’t within a manager’s direct control. According to the court, such deductions may be made because they can serve as an effective economic incentive to managerial-level employees to maximize company profit by increasing revenue and minimizing expenses.
Practical Impact of Ruling
The court’s distinction between exempt and nonexempt employees for cash shortage deductions may not hold up if the decision is appealed. The court based its decision on the cash shortage deduction provision of the wage orders, which doesn’t cover exempt employees. But other sources of law’including the Labor Code and prior court rulings’do apply to exempt employees and may similarly bar such deductions.
While this issue is being sorted out, here are some practical tips to help you avoid trouble:
- Review bonus plans. Examine your bonus plans or other incentive compensation plans to make sure they don’t include reductions for workers’ comp costs with respect to exempt and nonexempt employees. Cash shortage reductions must not be part of a compensation plan applying to nonexempt employees. And if they are part of an exempt employee plan, check with your lawyer to determine whether your plan is legal. A thorough review of your plans is especially time-sensitive if you’re preparing to pay out holiday or year-end bonuses.
- Consider alternatives. As this case highlights, employers cannot make employee pay deductions to cover workers’ comp costs. To avoid problems yet continue to provide an incentive for managers to focus on comp costs and avoid workplace injuries, consider providing an additional bonus for managers who perform well in this area.
- Know the rules. Generally, the law bars deductions from wages for cash shortages, breakage, or loss of equipment resulting from an employee’s simple negligence. You can, however, withhold wages for such losses caused by the employee’s dishonesty, willful act, or gross negligence. But keep in mind the Division of Labor Standards Enforcement takes the position that an unintentional act or accident rarely rises to the level of gross negligence.