Prachasaisoradej V. Ralphs Grocery Company - Employers And Employees Can Share In Profits

Article by R. Brian Dixon and Diane L. Kimberlin

In Prachasaisoradej v. Ralphs,1 No. S128576 (Cal. Aug. 23, 2007), a narrow majority of the California Supreme Court ruled that employers may lawfully use net-profit based incentive plans to compensate employees. The Ralphs decision presents a balancing point to a line of cases that had concluded that some types of deductions from other, albeit sometimes similar, forms of incentive compensation were invalid. The lawfulness of compensation plans that fall on the continuum at points between these earlier cases and the Ralphs decision is not clear.

The bonus plan at issue was based on target profit and target bonus figures. As the amount of actual profits increased in relation to the bonus plan target profits, the percent of the target bonus paid was increased. In calculating the profit, "pursuant to normal concepts of profitability," revenue of the store was subject to reduction for, among other expenses, workers' compensation claims, cash shortages, merchandise shortages or shrinkage, and the costs of nonemployee tort claims, which were not caused by the willful or dishonest acts or gross negligence of the employees. Other deductions presumably included the costs of goods sold, utilities and the renting of the premises.

The California Court of Appeal in Ralphs had followed an earlier decision concerning the same employer and concluded that incorporating certain challenged costs in the profit formula was unlawful.2 The court of appeal ruled that the profit calculation in the incentive plan resulted in unlawful deductions from the wages of all employees because workers' compensation costs were deducted when calculating net profits. Section 3751 of the California Labor Code3 prohibits an employer from taking any contribution from employees, or deducting any amount from their pay, either directly or indirectly, to cover any part of the cost of workers' compensation. Deductions that fall within section 3751 cannot be taken from the wages of exempt or nonexempt employees.

The court of appeal also ruled that the profit calculation in the incentive plan resulted in unlawful deductions from wages of nonexempt, hourly paid employees because deductions were made for cash and merchandise shortages and other losses, which were not the result of the willful or dishonest acts or gross negligence of the employees. Section 8 of the applicable Wage Order prohibits such deductions with respect to employees who...