Prachasaisoradej v. Ralphs Grocery Company (2007) 42 Cal.4th 217

Horvitz & Levy LLP represented Ralphs Grocery Company in this California Supreme Court case, in which the Court upheld a profit-based incentive employee bonus plan under the California labor laws. (Click here to read the opinion.)

The plan at issue promised grocery store employees a bonus, the amount of which would be determined based on a comparison of overall store profitability to a profitability target set by the employer. Depending on how much overall store profitability lagged behind or exceeded the target, the employee's bonus could range from nothing to 150 percent of a "target bonus," which was defined as a fixed percentage of the employee's regular wages.

The plaintiff argued the bonus plan violated the labor laws insofar as the determination of overall store profit took into account costs of workers' compensation and cash and merchandise shortages. The plaintiff claimed this amounted to the unlawful recovery of business expenses out of an employee's wages.

In a majority opinion joined by three other justices, Justice Baxter held the employees had no expectation of ascertainable compensation amounting to a wage until store profit was calculated by deducting store expenses from store sales. Taking the costs of workers' compensation and cash and merchandise shortages into account to determine store profit could not, therefore, be a deduction from the employee's wage. Once profit was determined, the employees received the bonus they had a right to expect, calculated according to the formula in the plan.

The decision is significant because the lower court’s contrary decision called into doubt the validity of all incentive compensation plans in California that are tied to overall business profits. Had the Supreme Court agreed that it is improper for an employer to deduct some or any expenses from business revenue to calculate the profit on which an employee bonus is based, then profit-based compensation would, as a practical matter, be unlawful in California – since profit is by definition what is left when revenues are reduced by all expenses.

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