Seyfarth Shaw LLP | www.seyfarth.com Litigating CA Wage & Hour and Labor Code Class Actions (22nd Edition) 25 B. Bonus Plan “Deductions” Relying on the broad anti-deduction dicta in cases that cited Kerr’s Catering, plaintiffs filed class actions alleging that certain bonus plans violated Labor Code Section 221 and Sections 400-410 when the amount of the bonus was determined in any part by the level of net profits of the business. Although an appellate court adopted much of the plaintiffs’ reasoning in the 2003 opinion Ralphs Grocery Co. v. Superior Court (Ralphs I),133 the California Supreme Court in Prachasaisoradej v. Ralphs Grocery Co. (Ralphs II)134 rejected much of that decision and instead held that net-profit based bonus systems are lawful. The plaintiffs argued that net profits were reduced when merchandise in the store was lost or broken or when cash went missing from the cash register. Accordingly, they argued, reducing an employee’s bonus when net profits decreased was tantamount to holding the employee personally liable for “business losses” that were not the employee’s fault. The plaintiffs also cited Labor Code section 3751, which forbids employers, “directly or indirectly,” to “exact or receive from any employee any contribution, or make or take any deduction from the earnings of any employee” to pay for workers’ compensation expenses.135 The plaintiffs argued that if these workers’ compensation expenses were factored into the net profit calculation, then any reduction in bonus to account for increased workers’ compensation expenses plainly violated Section 3751, just as a bonus taking cash shortages into account violated Section 8 of the Wage Orders, as interpreted by Kerr’s Catering.136 At least one appellate decision agreed that net-profits based calculations ran afoul of Section 3751.137 After several years in which many bonus plan class actions were filed, the California Supreme Court effectively put an end to them in 2007 with the issuance of Ralphs II.138 There, the Supreme Court held that traditional net-profits-based bonus systems are lawful in California and are not the functional equivalent of a scheme to deduct from employees’ wages on improper bases. The Supreme Court distinguished earlier cases that invalidated bonus plans that tied a bonus or commission to an employee’s individual sales effort, but that then reduced the bonus amount to cover employer costs. Under those types of bonus plans, employers used the bonus as an artifice to hide the fact that they were charging employees on a dollar-for-dollar basis for losses to the company and merely hid the deduction in the calculation of the so-called “bonus.”139 133 112 Cal. App. 4th 1090 (2003). 134 42 Cal. 4th 217 (2007). 135 Ralphs I, 112 Cal. App. 4th at 1101-1102. 136 Id. at at 1102-1103. 137 Ralphs I, 112 Cal. App. 4th at 1104-05. 138 Ralphs II, 42 Cal. 4th 217. 139 See, e.g., Quillian v. Lion Oil Co., 96 Cal. App. 3d 156 (1979) (manager received bonus calculated as a percentage of store sales minus the dollar value of any cash shortages during the bonus period).
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