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Profit-Sharing Bonus Plans May Take Company Expenses and Losses Into Account

In their own words, in Prachasaisoradej v. Ralphs Grocery Company, Inc. (2007) __ Cal.4th __, the California Supreme Court confronted a significant question of California wage law.  The order granting review set forth the following limited issue on appeal:

Petition for review after the Court of Appeal reversed the judgment in a civil action. The court limited review to the following issue: Does an employee bonus plan based on a profit figure that is reduced by a store's expenses, including the cost of workers compensation insurance and cash and inventory losses, violate (a) Business and Professions Code section 17200, (b) Labor Code sections 221, 400 through 410, or 3751, or (c) California Code of Regulations, title 8, section 11070?

Ralphs Grocery Company, Inc. implemented a written incentive compensation plan whereby certain employees of each store were eligible to receive, over and above their regular wages, supplementary sums based upon how the store’s actual Plan-defined profits, if any, for specified periods compared with preset profitability targets. For both target and actual purposes, profits were determined by subtracting store operating expenses from store revenues. Plaintiff claimed the Plan’s formula for calculating these supplemental profit-sharing payments violated California law prohibiting an employer from shifting certain of its costs to employees by withholding, deducting, or recouping them from wages or earnings, or otherwise obliging employees to contribute to them.

Labor Code § 221 provides that an employer may not “collect or receive from an employee any part of wages theretofore paid.” Labor Code § 3751(a) prohibits an employer from “exact[ing] or receiv[ing] . . . any employee . . . contribution,” or “tak[ing] any deduction from [employee] earnings . . . , either directly or indirectly, to cover the whole or any part the cost of [workers’] compensation.” Industrial Welfare Commission Wage Order 5 forbids such deductions and charges against the wages of nonexempt employees in the mercantile industry. Based upon these statutes and regulations, the Court of Appeal in Ralphs Grocery Co. v. Superior Court (2003) 112 Cal.App.4th 1090 held that the profit-based supplementary Plan was invalid because it considered a store’s costs for workers’ compensation when computing the store profit on which Plan payments were calculated and it factored cash shortages and merchandise damage and loss into the profit calculation. By doing so, the Plan effectively charged back a portion of such costs to employees through deductions from their wages. In Prachasaisoradej, the trial court sustained, without leave to amend, a demurrer to a complaint alleging unlawful bonus plan pay reductions based upon company expenses and losses. Relying upon Ralphs Grocery v. Superior Court, the Court of Appeal reversed, and the Supreme Court granted review, and last week, overturned the Court of Appeal's decision, holding that the reasoning of Ralphs Grocery is flawed, and the authorities on which that decision relied are distinguishable.

[N]othing in those authorities suggests that an employer violates 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.
The [plan] did not create an expectation or entitlement in a specified wage, then take deductions or contributions from that wage to reimburse Ralphs for its business costs.  At the outset, all Plan participants received, regardless of the store’s performance, their guaranteed normal rate of pay—the dollar wage they were promised and expected as compensation for carrying out their individual jobs. Over and above this regular wage, participants in the Plan understood that their collective entitlement to incentive compensation payments, and the amounts thereof, arose only under a formula that compared the store’s actual Plan-defined profit, if any, for a specified period, with target figures previously set by the company.
pursuant to normal concepts of profitability, ordinary business expenses, such as storewide workers’ compensation costs, and storewide cash and merchandise losses, were figured in, along with such other store expenses as the electric bill and the cost of goods sold, to determine the store’s profit, upon which the supplementary incentive compensation payments were calculated.  By doing so, Ralphs did not illegally shift those costs to employees.  After fully absorbing the expenses at issue, Ralphs simply determined what remained as profits to share with its eligible employees in addition to their normal wages.

To sum up, a true profit sharing bonus can taking into account any of the elements that are normally included in determining whether and in what amount a profit was earned. You can download the opinion in Prachasaisoradej from the Supreme Court's website in pdf or word format. What little we had to say about the Supreme Court argument was posted here.


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