Employee Profit Bonus is Legal in California

A bonus provision in an employment contract does not run afoul of the California Labor Code merely because its calculation takes into account losses and other expenses of the employer’s operation, according to a recent decision by the California Supreme Court.

California law prohibits employers from reducing wages of employees to reflect business losses or expenses. Employers, for example, can’t reduce wages to charge employees for broken equipment or disappearing property, or for other expenses that are usually the employer’s responsibility.  The state’s court of appeals had held that this rule applied to bonuses, so that an employer who offered a bonus based on profits could not lawfully deduct expenses from income to derive the profits.  Ralph’s Supermarkets, said the court, had violated the rule because in calculating profits it had deducted its expenses.

In Prachasaisoradej v. Ralphs Grocery Co., 07 C.D.O.S. 9940 (Aug. 23, 2007), California’s top court reversed, holding that reduction of a “bonus” was not a reduction in “wages” to the employee. Since the employer had paid the wages agreed to, and had specified that additional amounts were payable only if it achieved certain profits, and “profits” requires that expenses be taken into account, the practice was not illegal.

Doug Dexter and Diego Acevedo of San Francisco’s Farella Braun & Martel offer a recap of the case and their commentary here. Another take, by R. Brian Dixon and Diane L. Kimberlin of S.F.’s Littler Mendelson LP is here. (Free registration required for each.)

[Frank Snyder]