Litigating California Wage & Hour and Labor Code Class Actions

compensation expenses. 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. At least one appellate decision agreed that net profits based
calculations ran afoul of Section 3751. 65
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, 66 the
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 employee’s wages on improper
bases.
The California Supreme court distinguished earlier cases that invalidated bonus plans that
tied a bonus or commission to an employee’s individual sales effort, but which 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.” 67
By contrast, “the [Ralphs plan] did not create an expectation or entitlement in a specified
wage, then take deductions or contributions from that wage to reimburse Ralphs for its
business costs.” Each Ralphs store employee received a guaranteed dollar wage, which
was paid regardless of a store’s profit or loss for a specified period. Under the Ralphs
bonus plan, employees were entitled to a supplementary incentive compensation payment
“only after the store had completed the relevant period of operation” and the resulting profit
or loss figure was calculated. This final figure “was the amount offered or promised as
compensation for labor performed by eligible employees, and it thus represented their
supplemental ‘wages’ or ‘earnings.’” Therefore, the amount “offered or promised as
compensation for labor performed” already accounted for the deductions about which the
plaintiff complained. 68
Accordingly, the Ralphs plan did not illegally shift business losses to employees. Rather, it
provided supplemental compensation the company used to “encourage and reward certain
employees’ cooperative and collective contributions to the profitable performance of their
65
66
67
68
Ralphs I, 112 Cal. App. 4th at 1104-5.
42 Cal. 4th 217 (2007).
See, e.g., Quillian, 96 Cal. App. 3d 156 (1970) (manager received bonus calculated as a percentage of store sales
minus the dollar value of any cash shortages during the bonus period).
42 Cal. 4th at 229.
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