CALIFORNIA SUPREME COURT CHANGES DIRECTION AND ALLOWS PROFIT BASED INCENTIVE PLANS

The California Supreme Court has upheld an employer's profit-based incentive plan. In Prachasaisoradej v. Ralphs Grocery Co., Inc. S 128576 (Aug.23, 2007), the Court held that the employer could provide supplementary pay to employees to reward them, over and above their regular wages, if and when their collective efforts produced a profit for the store at which they worked. In so holding, the Court overruled lower court decisions that the employer improperly took deductions for cash shortages, merchandise damage, and the costs of workers' compensation when computing store profits.

Background

The plaintiff in Prachasaisoradej had argued that the plan at issue violated specific prohibitions against deductions from employee wages for the costs of workers' compensation, cash shortages, breakage or equipment loss not due to dishonest or willful acts or gross negligence of the employee, among others. A line of cases had held that deductions from employee sales commission and bonus payments, for any of the purposes prohibited by these laws were improper. In fact, an earlier decision of the court of appeal, involving the very same bonus plan, had ruled that the plan violated California law.

The Supreme Court held that the nature of the plan before it—as supplemental to the agreed and guaranteed wages paid as full compensation for work produced by the employees efforts—and the method of bonus calculation— based on a profit as determined by standard accounting procedures—compelled it to conclude that the bonus was not illegal.

What Does This Mean for Employers?

Employers can lawfully implement profit-based bonus plans that take into account expenses that had appeared to be off limits under previous law. However, because the Supreme Court did not overturn the earlier decisions, these opinions may have continuing effects when applied to bonus plans that are not similar to the one at issue in Prachasaisoradej.