Employers' Profit Sharing Plans Declared Lawful Under California Labor Law
Employers generally recognize that profit-sharing plans can be important tools for motivating employees and improving their morale. Such plans help focus employees on their employers’ bottom line and foster a common goal among employers and their employees. In California, however, such plans were also possibly unlawful until the California Supreme Court issued its recent decision in Prachasaisoradej v. Ralphs Grocery Co., Inc. In that ruling, the Court held that an employee bonus plan based on a profit figure that considered store expenses such as the cost of workers’ compensation insurance, cash shortages and inventory losses was lawful.
Prior to Prachasaisoradej, two California appellate courts had held that Ralphs’ profit-based employee bonus plans that used workers’ compensation costs, cash shortages, and merchandise damages to calculate the amount of profits to be shared with the employees in effect off-set a portion of those expenses against their employees’ wages. The appellate decisions held that such profit-based employee bonus plans violate California law because the state's Labor Code and wage and hour regulations prohibit employers from deducting such expenses from their employees’ wages
In analyzing the issues presented in Prachasaisoradej, the California Supreme Court first recognized that compensation plans that charge a portion of an employer’s expenses against an employee’s commissions or bonus that was dependent upon that employee’s individual efforts are unlawful. In such cases, employers pay less to employees than what they had offered or promised to pay, and as a result, the “employee[s], having performed the labor, actually received or retains less than the paid, offered or promised compensation.”
The Court then distinguished those compensation plans from the one utilized by Ralphs, finding that the Ralphs' plan did not involve deductions from the wages offered, promised and paid to the employees, and therefore did not affect the wages paid to Ralphs' employees. Under the Ralphs' bonus plan, “after the store had completed the relevant period of operation, and the resulting profit or loss figure was then derived, that it was possible to determine … whether [bonus plan] participants were entitled to a supplementary incentive compensation payment, and if so, how much. This final figure, and this figure only, once calculated, was the amount offered or promised as compensation for labor performed by eligible employees, and it thus represented their supplemental ‘wages’ or ‘earnings.’”
Accordingly, the Ralphs’ plan did not involve a deduction of employer’s expenses from its employees’ individual commissions or bonuses. Rather, it provided supplemental compensation the company used to “encourage and reward certain employees’ cooperative and collective contributions to the profitable performance of their stores” by providing them a portion of their store profits that “Ralphs would otherwise be entitled to retain for itself.”
Thus, Prachasaisoradej represents a victory for employers both because it held that an important compensation tool is lawful, and because it addressed and attempted to reconcile several of California’s complex and sometimes incongruous labor laws. For specific questions regarding the impact Prachasaisoradej may have on your business, please contact us directly.