2007-10

CLIENT ALERT – SUPREME COURT UPHOLDS NET PROFIT BASED BONUS PLAN

In a long-awaited decision, the California Supreme Court ruled today in Prachasaisoradej v. Ralphs Grocery Company, Inc. (“Ralphs”) that employers may take into consideration cash and merchandise shortages, and workers’ compensation costs when calculating bonuses under a net profit bonus plan. Since net profit based bonus plans are common, this ruling is extremely important for all California employers.

A heavily divided Supreme Court (4 - 3 decision) reversed the Court of Appeal which earlier ruled Ralphs violated California law by including such factors in its bonus plan. The Supreme Court treated shortages and workers’ compensation costs the same as other employer expenses (e.g., utility costs), when calculating net profit. The Supreme Court was careful to note that Ralphs’ bonus plan applied to employees store-wide, and was based on the store’s overall net profit. The Supreme Court distinguished earlier cases which invalidated deductions from an employee’s wages that were based on the employee’s individual performance, such as individual commission or bonus plans that considered cash shortages or unidentified merchandise returns. The ruling implies that such deductions in individual compensation plans are still prohibited. However, the Court also cited with approval a recent line of cases which upheld “charge backs” from commission advances.

The Ralphs decision emphasizes the need for employers to be very careful in crafting bonus and commission plans to ensure compliance and avoid costly litigation. Please call your Firm contact if you have any questions about the effect of this decision on your company’s compensation plans. A copy of the Ralphs decision can be obtained from the following link:

http://www.courtinfo.ca.gov/opinions/documents/S128576.DOC

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