California Supreme Court Approves Profit-Based Incentive Plans

August 24, 2007

Today, the California Supreme Court issued its long-awaited opinion in the case Prachasaisoradej v. Ralph’s Grocery Company, Inc. [click here to view this opinion]. In it, the California Supreme Court reversed a lower court decision and ruled that it was permissible for California employers to provide supplementary incentive compensation to employees on the basis of a store or company profits, even if that “profit” calculation takes into account items such as workers’ compensation costs, product shrinkage, or other costs that must otherwise be borne solely by the employer.

Summary

The key issue in Ralph’s Grocery was whether including certain cost items in a profit-based bonus calculation amounted to an unlawful “deduction” from employee wages. In concluding that such a bonus was permissible, the California Supreme Court examined the language of each of the relevant statutes and regulations in considerable detail, but was ultimately persuaded that extra pay for employees – however calculated – was permissible and commendable, and should not be illegal.

What This Means

This decision is a refreshing breath of common sense. For those employers who have disassembled their prior incentive plans as a result of the earlier, contrary appellate courts' decisions, now is a good time to revisit those plans. For those employers who maintained profit-based incentive compensation systems throughout this uncertain period, now is the time to breathe a sigh of relief.

A slight word of caution is warranted, however: It is likely that certain employee advocacy groups, who are undoubtedly displeased with this opinion, may seek legislative action to unwind today’s opinion. However, until and unless that occurs (which seems unlikely given that the present legislative term is drawing to a close), profit-based incentive compensation plans are, once again, viable benefit tools.

This E-Update was authored by E. Joseph Connaughton. For more information, please contact Mr. Connaughton or any Paul, Plevin attorney at 619-237-5200.

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