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Bonus-Plan Consideration of Profits

January 18, 2008
Related Topics: Compensation Design and Communication, Miscellaneous Legal Issues, Featured Article
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Ralph's Grocery Co. implemented an incentive compensation plan where eligible employees could receive supplemental sums over and above regular wages based on profits from its stores. The employer’s incentive plan identified a bonus pool derived from each of its stores’ net profits, which included offsets of store operating expenses for workers’ compensation costs and cash losses.

    A produce manager for Ralphs filed suit and alleged that the bonus plan violated the California Labor Code and regulations that prohibit an employer from shifting certain of its business costs to employees. Specifically, California law precludes an employer from using employees’ wages to shift business losses to employees—or to make employees the insurers of such losses—and from collecting or receiving any part of paid wages and deductions from employee earnings to cover costs.

    The California Supreme Court ruled that the Ralphs incentive compensation plan did not violate these laws. The court reasoned that Ralphs did not take any unauthorized deductions from promised wages. Rather, the supplementary compensation that Ralphs promised under the bonus plan was intended to promote and reward employee teamwork that produces a net profit for the store as a whole. Furthermore, nothing in California law prohibited an employer from offering its employees, over and above their guaranteed base wages, supplementary incentive compensation on the basis of store profits that remain after legitimate store expenses, including the costs of workers’ compensation, have been subtracted from store revenues. Prachasaisoradej v. Ralphs Grocery Co. Inc., Cal. Supreme Court, Nos. S128576 (8/23/07).

    IMPACT: Employers should proceed with caution when making deductions from employees’ wages. However, California employers may use profitability measures that take into account legitimate business expenses in the calculation of employee bonus compensation. In all cases, employers should give careful consideration of applicable regulations, cases, laws and statutes before adopting compensation plans that calculate benefits based on overall profits.

Workforce Management, January 14, 2008, p. 6 -- Subscribe Now!

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