Prachasaisoradej v. Ralphs Grocery: California Supreme Court Upholds Legality of Employer Profit-Incentive Plans

The California Supreme Court decision today in Prachasaisoradej v. Ralphs Grocery, finally clarified once-and-for-all that employer profit-based incentive plans are permissible in California. For the uninitiated, this might seem like a “no brainer.” After all, what could possibly be wrong with sharing profits with one’s employees, isn’t that the type of responsible corporate citizenship that should be encouraged in a 21st Century “ownership society.”  

In fact, prior to today’s decision, Plaintiff’s lawyers had successfully prosecuted a number of class actions that that claimed these plans were illegal. The operative legal theory of these lawsuits (some of which resulted in multi-million dollar settlements) was that the employer’s plans illegally required workers to foot part of the bill for the company’s business expenses because any increase in expense items could result in lower wages. 

The Ralph’s Groceries decisions seems to have put a stake in the heart of this specious line of reasoning. In the process of upholding the legality of an incentive plan for grocery store managers, the Court explained:

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.

Employers should keep in mind, however, that the Ralph’s Groceries decision was not dealing with earned wages. In terms of legal consequences, there is a world of difference between making a determination of what an employee must do in order to earn a bonus in the future (such as meeting the store profitability target at issue in Ralph’s Groceries) and making an after-the-fact reduction in a bonus that has already been earned. The latter scenario will almost always be illegal.

Once we are able to dissect the decision more, we will post more of our thoughts about the case.  The case can be read in its entirety here

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