California Supremes: Bonuses Legal in California!

When I am asked to give examples of California employment law that makes people in other states smack their foreheads, wage and hour law always provides the best ones. In recent years, courts held that profit-based bonus plans were illegal in California because they took into account costs such as workers' compensation premiums and breakage, merely within the FORMULA used in calculating a profit-based bonus. Pity me. When I advise out-of-state employers on this issue, I usually have to hold the phone six inches from my ear.

No more. A sliver of sanity was restored today. The California Supreme Court decided in PRACHASAISORADEJ v. RALPHS GROCERY COMPANY, INC., that such bonuses are perfectly legal. That is, employers no longer have to fear giving extra compensation to employees based on profitability. The essence of the Court's decision:

The Plan was not illegal, we conclude, simply because, pursuant to normal concepts of profitability, ordinary business expenses, such as storewide workers’ compensation costs, and storewide cash and merchandise losses, were figured in, along with such other store expenses as the electric bill and the cost of goods sold, to determine the store’s profit, upon which the supplementary incentive compensation payments were calculated. By doing so, Ralphs did not illegally shift those costs to employees. After fully absorbing the expenses at issue, Ralphs simply determined what remained as profits to share with its eligible employees in addition to their normal wages.