Filed 8/23/07
IN THE SUPREME COURT OF CALIFORNIA
EDDY KORKIAT PRACHASAISORADEJ, )
Plaintiff and Appellant,
S128576
v.
Ct.App. 2/2 B165498,
RALPHS GROCERY COMPANY, INC.
B168668
Los Angeles County
Defendant and Respondent.
Super. Ct. No. BC254143
We confront a significant question of California wage law. Defendant
Ralphs Grocery Company, Inc. (Ralphs), a supermarket chain, implemented a
written incentive compensation plan (ICP or Plan) whereby certain employees of
each store were eligible to receive, over and above their regular wages,
supplementary sums based upon how the store’s actual Plan-defined profits, if
any, for specified periods compared with preset profitability targets. For both
target and actual purposes, profits were determined by subtracting store operating
expenses from store revenues. Plaintiff claims the Plan’s formula for calculating
these supplemental profit-sharing payments thus violated California statutes, rules,
and decisions that prohibit an employer from shifting certain of its costs to
employees by withholding, deducting, or recouping them from wages or earnings,
or otherwise obliging employees to contribute to them.
1
Labor Code section 2211 provides that, except for deductions expressly
authorized by state or federal law (see § 224), an employer may not “collect or
receive from an employee any part of wages theretofore paid.” Section 3751,
subdivision (a) prohibits an employer from “exact[ing] or receiv[ing] . . . any
employee . . . contribution,” or “tak[ing] any deduction from [employee]
earnings . . . , either directly or indirectly, to cover the whole or any part the cost
of [workers’] compensation.” Case law has interpreted various provisions of the
Labor Code, and regulations issued thereunder, as prohibiting deductions from an
employee’s stated wage to cover certain of the employer’s business costs, such as
cash and merchandise losses not caused by the employee’s dishonesty, or his
willful or grossly negligent act. A wage order of the Industrial Welfare
Commission (Commission) expressly forbids such deductions and charges against
the wages of so-called nonexempt employees in the mercantile industry. (Cal.
Code Regs., tit. 8, § 11070, subd. 8 (Regulation 11070).)
Deeming its decision compelled by prior case law, by section 3751, and by
Regulation 11070, the Court of Appeal in Ralphs Grocery Co. v. Superior Court
(2003) 112 Cal.App.4th 1090 (Ralphs Grocery) held that the profit-based
supplementary ICP we consider here was invalid insofar as it considered a store’s
costs for workers’ compensation when computing the store profit on which Plan
payments were calculated. Moreover, Ralphs Grocery concluded, the Plan was
invalid as to nonexempt employees insofar as it factored cash shortages and
merchandise damage and loss into the profit calculation. By doing so, Ralphs
Grocery reasoned, the Plan effectively charged back a portion of such costs to
employees through deductions from their wages.
1
All subsequent unlabeled statutory references are to the Labor Code.
2
On the authority of Ralphs Grocery, the instant Court of Appeal reversed a
trial court judgment for Ralphs, entered after Ralphs’s demurrer to plaintiff’s
complaint was sustained without leave to amend. We must now decide whether
these latter decisions are correct.
After a careful examination of the relevant statutes, regulation, and judicial
decisions, we reach a result largely contrary to the holdings of Ralphs Grocery and
the instant Court of Appeal. As we will explain, nothing in those authorities
suggests that an employer violates California wage-protection laws by providing,
as Ralphs did, supplementary compensation designed to reward employees, over
and above their regular wages, if and when their collective efforts produced a
positive financial result for the store where they worked.
As described in plaintiff’s complaint, the ICP 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. At the outset, all Plan participants
received, regardless of the store’s performance, their guaranteed normal rate of
pay—the dollar wage they were promised and expected as compensation for
carrying out their individual jobs. Over and above this regular wage, participants
in the Plan understood that their collective entitlement to incentive compensation
payments, and the amounts thereof, arose only under a formula that compared the
store’s actual Plan-defined profit, if any, for a specified period, with target figures
previously set by the company. Once the amount of an employee’s ICP
compensation was calculated under this formula, Ralphs did not reduce it by
taking unauthorized deductions, contributions, or charges.
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,
3
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.
In sum, we are persuaded that the reasoning of Ralphs Grocery is flawed,
and the authorities on which that decision relied are distinguishable. Ralphs’s
ICP, as described in plaintiff’s complaint, was not illegal on the grounds plaintiff
asserts. We will therefore reverse the instant Court of Appeal judgment.
FACTS AND PROCEDURAL BACKGROUND
In 2001, plaintiff, a produce manager in a Ralphs store, filed original and
first amended complaints against Ralphs, on behalf of himself and other similarly
situated Ralphs employees. The complaints alleged that, in addition to their
regular wages, the relevant employees were paid supplementary compensation
calculated on the basis of the net earnings of the store where they worked, and that
the pertinent earnings figures were reduced—illegally for this purpose—by the
store’s expenses for cash shortages, damaged or lost merchandise, workers’
compensation, tort claims by nonemployees, and other business expenses beyond
the employees’ control.
This formula, the complaints asserted, violated wage-protection rules set
forth in Labor Code sections 221, 400 through 410, and 3751, Regulation 11070,
and associated cases, and was thus an unfair business practice prohibited by 17200
of the Business and Professions Code. The complaints sought injunctive relief,
restoration of lost wages, interest, and attorney fees.
Ralphs removed the case to federal court on grounds that plaintiff’s
compensation, including the incentive portion thereof, was governed by his
union’s collective bargaining agreement (CBA), and that the state-law claims were
4
thus preempted by section 301 of the Labor Management Relations Act (LMRA)
(29 U.S.C. § 185(a).) On plaintiff’s motion, the district court remanded the case,
finding that no federal question was presented, because the claims arose under
state law independent and irrespective of the CBA.
Following the remand, plaintiff filed a second amended complaint for
himself and an alleged class of Ralphs employees covered by the Plan. This
complaint alleged, as before, that the incentive compensation payments were
calculated on the basis of the respective net earnings of the store where the
covered employees worked, and that the net earnings figures used for this purpose
were derived by subtracting, among other expenses, “workers’ compensation
claims and/or other losses” such as cash shortages, merchandise shortages or
shrinkage, and the costs of nonemployee tort claims, “not caused by the willful or
dishonest act(s) or gross negligence of” the individual employees whose
compensation was thereby diminished.
“Through this method of compensation,” the second amended complaint
asserted, Ralphs “wrongfully deduct[s] expenses from the wages of [its]
employees, including [p]laintiff, which expenses the law requires . . . to be borne
by the . . . employer[ ]. In other words, [the employees] are forced to carry the
burden of losses from their respective stores in violation of” Labor Code sections
221, 400 through 410, and 3751, Business and Professions Code section 17200,
and Regulation 11070. The complaint sought injunctive relief, classwide lost
wages according to proof, waiting time penalties, damages, disgorgement of
wrongful profits, and fees and costs.
Ralphs demurred to the second amended complaint on grounds that the
claims (1) were preempted by the LMRA and (2) did not allege violations of state
law in any event. As to the latter issue, Ralphs asserted that incentive
compensation, paid over and above the regular wage, and openly contingent on the
5
achievement of profitability goals, as profitability is normally defined, does not
constitute an improper charge against, or deduction from, wages in violation of the
Labor Code.2
The trial court sustained the demurrer, finding the claims preempted by
federal law. As a consequence, it did not decide whether they would otherwise be
viable as a matter of state law. A judgment of dismissal was entered accordingly.
Plaintiff appealed. The Court of Appeal for the Second Appellate District,
Division Two, reversed. Contrary to the trial court, the Court of Appeal held that
plaintiff’s claims did not depend on construction or application of the CBA, but
arose under independent provisions of state law, and were thus not preempted by
the LMRA. Then, addressing the issue left undecided by the trial court, the Court
of Appeal applied Ralphs Grocery, supra, 112 Cal.App.4th 1090, to conclude that
the second amended complaint’s allegations of state law violations were sufficient
2
In opposition to Ralphs’s demurrer, plaintiff asked the trial court to take
judicial notice of the 1999, 2000, and 2001 versions of Ralphs’s “Semiannual
Incentive Compensation Program for Store Teams.” Copies of these plans are
thus included in the appellant’s appendix on appeal, though the trial court never
formally ruled on the motion for judicial notice. The plan’s provisions are stated
in extremely technical terms. In its opening brief on the merits in this court,
Ralphs describes the operation of the plans at issue as follows: “Ralphs calculated
a target bonus for an employee that was a percentage of the employee’s regular
wages. . . . Ralphs also set target earnings or profits for the employee’s store
(‘Earnings Before Interest, Taxes, Depreciation and Amortization’ or ‘EBITDA’).
The employee’s actual bonus was the target bonus adjusted up or down under a
detailed formula set forth in the plan. First, the formula compared a store’s target
earnings against actual earnings. Then, to the extent actual earnings met,
exceeded, or fell below the target earnings, the plans applied the ratio of the actual
to target earnings to increase or decrease the target bonus, thereby determining the
actual bonus. The actual bonus could range from 0% to 150% of the target bonus.
Ralphs’ collective bargaining agreement with [plaintiff’s] union permitted
payment of this bonus compensation in addition to the union negotiated wages.”
Though plaintiff disputes the legal consequences of a plan that operates in this
manner, he does not materially dispute Ralphs’s description of its operation.
6
to withstand demurrer. The Court of Appeal remanded for proceedings consistent
with its opinion.
We granted Ralphs’s petition for review, limiting the issues to the
following: Does an employee bonus plan based on a profit figure that is reduced
by a store’s expenses, including the cost of workers’ compensation insurance and
cash and inventory losses, violate (a) Business and Professions Code section
17200, (b) Labor Code sections 221, 400 through 410, or 3751, or (c) Regulation
11070? We turn to that question.
DISCUSSION
As noted above, section 221 provides that an employer may not “collect or
receive from an employee any part of wages theretofore paid by said employer to
said employee.” “Wages” for this purpose “includes all amounts for labor
performed by employees of every description, whether the amount is fixed or
ascertained by the standard of time, task, piece, commission basis, or other method
of calculation.” (§ 200, subd. (a).)3
Section 3751, subdivision (a), makes it a misdemeanor for an employer to
“exact or receive from any employee any contribution, or make or take any
deduction from the earnings of any employee, either directly or indirectly, to cover
the whole or any part of the cost of [workers’] compensation.”
Regulation 11070—a Commission wage order covering “mercantile
industry” workers except those “exempt” employees in administrative, executive,
or professional positions (id., subd. 1)—provides that “[n]o employer shall make
any deduction from the wage or require any reimbursement from an employee for
3
Section 221 does not preclude deductions required or authorized by federal
or state law, or for medical insurance premiums and welfare and pension
contributions authorized in writing by the employee, or by the terms of a collective
bargaining agreement. (§ 224.)
7
any cash shortage, breakage, or loss of equipment, unless it can be shown that the
shortage, breakage, or loss is caused by a dishonest or willful act, or by the gross
negligence of the employee.” (Id., subd. 8.) The order defines “wages” as in
section 200, subdivision (a). (Reg. 11070, subd. 2(O).)4
Under these laws, plaintiff urges, the profitability figure on which, under
Ralphs’s ICP, supplementary profit-based incentive compensation was calculated
could not be reduced by the employer’s workers’ compensation expenses, or by
cash shortages, the costs of merchandise damage or loss, or third party tort claims
not attributable to the eligible employee’s own dishonesty, willfulness, or gross
negligence. Otherwise, plaintiff contends, the employee’s stated and expected
wage was subject to an unanticipated contribution, deduction, withholding, and/or
reimbursement to the employer for expenses beyond the employee’s control,
which the law requires the employer to bear on its own.
Plaintiff’s contention depends entirely on the meaning of the statutes and
regulation we have noted above. Whenever we construe such a provision, we look
first to its words, assigning them their usual and ordinary meanings, and reading
them in context. If the words themselves are clear, we assume they mean what
4
The original and first amended complaints described plaintiff as a store
produce manager. The second amended complaint does not state his job. Nor
does it specify each employee classification to which the plan applies or applied.
It simply alleges that plaintiff is a member, and a representative, of a class
comprised of “all employees who have worked for [d]efendant[ ] within the State
of California, including, but not limited to, operating managers, assistant
managers, general managers, market managers, district managers, and/or
operations managers, grocery managers, produce managers, meat managers, fish
managers, service deli managers, bakery managers, floral managers, deli
managers, liquor managers, and all other employees who were paid a bonus”
pursuant to the Plan. Ralphs has not argued that plaintiff is an administrative,
executive, or professional employee exempt from the Commission wage order.
We therefore have no occasion to determine whether the specific provisions of the
order are inapplicable to plaintiff.
8
they say, and the plain meaning governs. If the language allows more than one
reasonable construction, we may consider extrinsic aids to construction, including
the impact of a particular interpretation on public policy. (E.g., Murphy v.
Kenneth Cole Productions, Inc. (2007) 40 Cal.4th 1094, 1103; Wells v. One2One
Learning Foundation (2006) 39 Cal.4th 1164, 1190.) Because the laws
authorizing the regulation of wages, hours, and working conditions are remedial in
nature, courts construe these provisions liberally, with an eye to promoting the
worker protections they were intended to provide. (E.g., Ramirez v. Yosemite
Water Co. (1999) 20 Cal.4th 785, 794.)
Here we must determine, under the requisite statutes and regulation,
whether Ralphs’s ICP withheld, or otherwise took, received, exacted, or collected
impermissible “deductions” or “contributions” from Ralphs employees, or from
their “earnings” or “wages,” to “reimburs[e]” Ralphs, in whole or in part, for
business expenses the law required Ralphs to bear on its own.
As noted above, a “wage” for this purpose is “[any] amount [paid] for [an
employee’s] labor,” however that amount is calculated. (§ 200.) “Earnings” are
“[t]he salary or wages of a person.” (American Heritage Dict., (2d college ed.
1985) p. 434.) To “deduct” is to “take away [one amount] from another;” to
“subtract.” (Id., at p. 373.) “Deduction” is “the act of deducting,” or “[a]n amount
that is . . . deducted.” (Ibid.) A “contribution” is “something contributed;” while
to “contribute” is “[t]o give . . . in common with others [or] to a common fund or
for a common purpose.” (Id., at p. 318.)
Under these common definitions, an employee’s “wages” or “earnings” are
the amount the employer has offered or promised to pay, or has paid pursuant to
such an offer or promise, as compensation for that employee’s labor. The
employer takes a “deduction” or “contribution” from an employee’s “wages” or
“earnings” when it subtracts, withholds, sets off, or requires the employee to
9
return, a portion of the compensation offered, promised, or paid as offered or
promised, so that the employee, having performed the labor, actually receives or
retains less than the paid, offered, or promised compensation, and effectively
makes a forced “contribution” of the difference.
Here, each Ralphs store employee was offered, promised, and paid, as full
compensation for his or her individual work, an agreed and guaranteed dollar
wage, which did not vary with the store’s financial fortunes, and from which no
unauthorized amounts were deducted, withheld, set off, or otherwise received or
collected back by the employer.5 In addition, Ralphs then sought, through the
Plan, to encourage and reward certain employees’ cooperative and collective
contributions to the profitable performance of their stores by sharing with these
employees, in addition to their regular wages, a portion of the profits, if any, their
efforts had produced, and which Ralphs would otherwise be entitled to retain for
itself.
Employees’ expectations with respect to these supplementary payments—
i.e., what Ralphs offered or promised to pay—derived exclusively from the terms
of the Plan itself. By these terms, an individual store employee’s entitlement to a
periodic incentive compensation payment, and the amount of any such payment,
depended fundamentally on (1) whether the store’s overall operations for the
period had been profitable, as the Plan defined profitability, and (2) how any such
profit compared to goals or targets previously set for the store. The first and most
basic step in determining whether, and to what extent, supplementary incentive
5
As plaintiff acknowledged in the Court of Appeal, the ICP payments did
not reduce the union-negotiated regular wage payable to Plan participants, and the
relevant CBA expressly provided that payments under the Plan would not be used
to offset regular wages. Plaintiff also does not contend that the regular,
guaranteed wage received by any Plan participant fell below the applicable federal
or state minimum wage.
10
compensation payments were due to store employees was to ascertain whether the
store had registered a Plan-defined profit for the relevant period.
Under the Plan formula, the relevant profit figure was calculated by
subtracting various store expenses from store revenues. The record contains no
exhaustive catalog of the expenses considered—we may infer that “ ‘ “[i]nterest,
[t]axes, [d]epreciation, and [a]mortization” ’ ” were not among them (see fn. 2,
ante)—but, pursuant to usual accounting principles, the included items
presumably encompassed such day-to-day operating expenses as the store’s cost of
goods sold, its payroll, its utility bills, any rent paid for the store premises, and the
like. They similarly included the store’s expenses for workers’ compensation,
cash shortages, merchandise losses, and third party tort claims not traceable to the
gross negligence, dishonesty, or willful misconduct of individual employees
subject to the Plan.
By the Plan’s terms, it was only after the store had completed the relevant
period of operation, and the resulting profit or loss figure was then derived, that it
was possible to determine, by a further comparison to the preset targets, whether
Plan participants were entitled to a supplementary incentive compensation
payment, and if so, how much. This final figure, and this figure only, once
calculated, was the amount offered or promised as compensation for labor
performed by eligible employees, and it thus represented their supplemental
“wages” or “earnings.”
Plaintiff concedes Ralphs followed the Plan to the letter, and paid all
amounts due thereunder, exactly as provided. He does not claim Ralphs received,
deducted, withheld, set off, or otherwise exacted any unauthorized amount from
any employee’s supplementary incentive compensation as finally computed and
paid under the Plan.
11
Plaintiff nonetheless insists the Plan violated the law because, by
subtracting workers’ compensation costs, and damage or loss expenses beyond
individual employees’ control, from the store’s revenues to determine the profit
figure on which supplementary incentive compensation payments were calculated,
the Plan reduced, to that extent, the “wages” or “earnings” otherwise due.
Accordingly, plaintiff asserts, Ralphs effectively shifted to employees, by virtue of
deductions from their expected wages, costs the law requires the employer to bear
on its own. We disagree.
For his premise, plaintiff, like the Courts of Appeal here and in Ralphs
Grocery, supra, 112 Cal.App.4th 1090, invokes a body of California case law that
has developed around some of the statutes and regulations quoted above, or
closely analogous ones. As we shall explain, however, the cited decisions are
inapposite to this profit-based ICP.
The line of cases on which plaintiff relies begins with a 45-year-old
decision of this court, Kerr’s Catering Service v. Department of Industrial
Relations (1962) 57 Cal.2d 319 (Kerr’s Catering). There, each of the employer’s
female lunch-truck drivers was entitled to receive, as part of her compensation, a
15 percent commission on her own sales exceeding $475 per week. However, the
promised commission was subject to reduction for any cash shortage attributable
to the driver for the month. The employer computed the cash shortage figure by
comparing, at the end of each day, the driver’s cash receipts and remaining
inventory against inventory on the truck at the beginning of the day. The amount,
if any, by which the latter exceeded the former was the daily shortage.
The Division of Industrial Welfare notified the employer that this practice
violated Wage Order No. 5-57, which, in terms essentially identical to those of
current Regulation 11070, prohibited “deduction[s]” from wages for cash
shortages, breakage, or loss of equipment not caused by the employee’s
12
dishonesty, willful act, or culpable negligence. (Kerr’s Catering, supra, 57 Cal.2d
319, 322.) The employer sued for injunctive and declaratory relief, urging that
Wage Order No. 5-57 exceeded the Commission’s authority. The trial court
entered judgment for the employer, and this court reversed.
Our opinion first noted the parties’ agreement that the Commission’s power
derived from former section 1182,6 which authorized the Commission to “fix” the
“minimum wage” (former § 1182, subd. (a)), maximum hours (id., subd. (b)), and
“standard conditions of labor” (id., subd. (c)) for women and minors. (Kerr’s
Catering, supra, 57 Cal.2d 319, 323.) Because the drivers earned more than the
minimum wage independent of the sales commission, the issues presented were
whether, under subdivision (c), the Commission could regulate “standard
conditions of labor” insofar as they affected wages beyond the minimum wage,
and, if so, whether the deduction of cash shortages from the drivers’ sales
commissions was a condition subject to regulation under subdivision (c).
The court disposed of the first issue easily. It concluded that subdivision
(c) allowed the Commission to regulate “standard conditions of labor” in ways that
affected, but did not “fix,” wages above the statutory minimum and hours below
the statutory maximum. (Kerr’s Catering, supra, 57 Cal.2d 319, 323-325.)
Addressing the second issue, the court cited multiple provisions of the
Labor Code to justify the Commission’s regulation of loss, breakage, and shortage
deductions from employee wages. First, the court observed, the public policy of
special protection for wages generally had been expressed in numerous statutes
and decisions that required the prompt and full payment of wages due, as the
employee’s exclusive property, and imposed limitations on the ability of creditors,
including the employer itself, to satisfy unliquidated claims against the employee
6
See now section 1173.
13
by using garnishment, assignment, or accord and satisfaction to appropriate wages
otherwise due. (Kerr’s Catering, supra, 57 Cal.2d 319, 325-327.)
Kerr’s Catering noted in particular that the deductions taken from the sales
commissions there at issue extended to shortages beyond the driver’s control, or
the result of mere simple negligence. Hence, the court reasoned, these deductions
effectively made her an insurer of the employer’s merchandise and served the
same purpose as an employee’s bond to cover such losses. Accordingly, they
contravened “the spirit, if not the letter, of the Employees Bond Law” (§§ 400-
410), which states the exclusive conditions under which employers may require
employees to furnish such cash undertakings. (Kerr’s Catering, supra, 57 Cal.2d
319, 328.)
The court suggested that employers, exploiting their superior position,
could also use such deductions to defraud employees by withholding inflated and
exorbitant amounts, thus effectively reducing the wage scale. Such concerns, said
the court, underlie section 221, which was adopted to prevent the use of secret
deductions or “kickbacks” to make it appear the employer is paying a required or
promised wage, when in fact it is paying less. (Kerr’s Catering, supra, 57 Cal.2d
319, 328.)
“A further reason for legislative disapproval of deductions,” the court
observed, “exists in the reliance of the employee on receiving his expected wage,
whether it be computed upon the basis of a set minimum, a piece rate, or a
commission. To subject that compensation to unanticipated or undetermined
deductions is to impose a special hardship on the employee.” (Kerr’s Catering,
supra, 57 Cal.2d 319, 329.)
Finally, the court rejected the employer’s complaint that Wage Order 5-57
unfairly placed the burden of the cash shortages on the employer. The court
explained that “some cash shortages, breakage and loss of equipment are
14
inevitable in almost any business operation. It does not seem unjust to require the
employer to bear such losses as expenses of management when it is presently the
unchallenged practice [also pursuant to Wage Order 5-57] to require him to bear,
as a business expense, the cost of tools and equipment, protective garments and
uniforms furnished to the employee by prohibiting . . . deductions for these costs.
[¶] Furthermore, the employer may, and usually does, either pass these costs on to
the consumer in the form of higher prices or lower his employees’ wages
proportionately, thus distributing the losses among a wide group.” (Kerr’s
Catering, supra, 57 Cal.2d 319, 329, italics added.)
In Quillian v. Lion Oil Company (1979) 96 Cal.App.3d 156 (Quillian), the
plaintiff managed two of defendant’s self-service gasoline stations. Her
mandatory employment agreement included provision for a manager’s incentive
bonus in addition to her modest base pay. The bonus, intended to encourage
managerial efforts to increase sales and reduce losses, was defined as a dollar
amount based on the volume of gasoline sold at the stations, plus a flat 1 percent
of the stations’ nongasoline sales, less the full dollar amount of cash and
merchandise shortages at the stations.7
In a suit for unpaid wages attributable to the shortages, the trial court
entered judgment for the plaintiff. The Court of Appeal affirmed. Noting the
Labor Code’s prohibition of deductions from wages (§ 221), the court held that
under Kerr’s Catering, reduction of the promised bonus by shortages applicable to
the stations under the plaintiff’s supervision constituted an illegal charge against
7
In other words, the full amount of the stations’ cash and merchandise
shortages, however and by whomever caused, were subtracted dollar for dollar to
arrive at this single employee’s final bonus. Thus, against a percentage of the
stations’ sales revenues, she alone shouldered the entire burden of their losses and
shortages to the extent of the bonus otherwise payable.
15
employee earnings, and made her an insurer of the employer’s merchandise in
violation of the employees bond law. (Quillian, supra, 96 Cal.App.3d 156, 163.)
The employer argued that there were no deductions from the plaintiff’s
wages, because the actual amount of the wage, in the form of the bonus, was
determined only after losses and shortages were applied against volume and sales
figures. Once so determined, the employer insisted, the wage was paid without
deduction. The Court of Appeal deemed this a mere circumvention. In reality, the
court observed, the bonus was a commission—a scheduled amount based on sales
volume and revenue. To the extent cash and merchandise shortages were charged
against this scheduled amount, said the court, the result was the same as in Kerr’s
Catering—the employee carried the burden of the employer’s losses and suffered
the “special hardship” of “unanticipated” or “undetermined” deductions from the
set wage. (Quillian, supra, 96 Cal.App.3d 156, 163.)
Again citing Kerr’s Catering, the court stressed that placing the burden of
cash and merchandise shortages on the employer was not unjust, because the
employer could pass the cost on to customers “ ‘or lower [its] employees’ wages
proportionately, thus distributing the losses among a wide group.’ ” (Quillian,
supra, 96 Cal.App.3d 156, 162, quoting Kerr’s Catering, supra, 57 Cal.2d 319,
329.)
In Hudgins v. Nieman Marcus Group, Inc. (1995) 34 Cal.App.4th 1109
(Hudgins), sales associates for a department store chain were paid commissions on
their individual “net sales.” (Id., at p. 1113.) Associates received advances, or
draws, against commissions, subject to charge backs against future draws if actual
commissions, as finally determined, fell short of the amounts previously advanced.
Until 1986, an associate’s net sales were defined as his or her gross sales, less (1)
gift wrap and alterations on those items and (2) “identified returns”—i.e., goods
returned during the pay period which could be identified as sold by that employee.
16
In 1986, after obtaining associates’ signed acknowledgements of the new policy,
the employer began charging back, against each associate’s earned commissions
on his or her own net sales, a pro rata share of advance commissions deemed to
have been paid on “unidentified returns”—i.e., returned merchandise as to which,
for whatever reason, the selling employee could not be determined.
Plaintiff, a sales associate subjected to this policy, sued for himself and
others to obtain lost wages and other relief, claiming that the deduction for
unidentified returns violated section 221. The trial court granted summary
judgment for the employer. The Court of Appeal reversed.
Deeming the case governed by Kerr’s Catering and Quillian, the Court of
Appeal held that the deduction from employees’ earned commissions on valid
sales to reimburse the employer for the cost of unidentified returns violated section
221, sections 400-410, and pertinent wage orders such as Regulation 11070.
These provisions, said the court, have “long been held to prohibit deductions from
an employee’s wages for cash shortages, breakage, loss of equipment, and other
business losses that may result from the employee’s simple negligence.
[Citations.]” (Hudgins, supra, 34 Cal.App.4th 1109, 1118.)
The court explained that insofar as the inability to identify which associate
had sold the returned merchandise was the result of that employee’s record-
keeping negligence, conscientious employees were giving up their own earned
commissions to cover losses occasioned by the misconduct of others. Conversely,
said the court, if the cause of the unidentified return was customer neglect, abuse,
or dishonesty, conscientious employees were sacrificing their own earned
commissions to compensate the employer for losses occasioned by its generous
return policy.
Either way, the court concluded, “employees [were made] the ‘insurers of
the employer’s business losses’ ” (Hudgins, supra, 34 Cal.App.4th 109, 1123) and
17
were subjected to unpredictable deductions from their wages for losses due to
factors beyond their control (id., at pp. 1123-1124). As in Quillian, the court
further admonished, the employer could not defend the lawfulness of its policy on
grounds that “the deduction is just [one] step in its calculation of commission
income. [Citation.]” (Hudgins, supra, at p. 1124.)
Ralphs Grocery, supra, 112 Cal.App.4th 1090, presented the precise issue
we address in this case—whether a cause of action arose for wages improperly
withheld under Ralphs’s ICP. As here, the plaintiff sought to represent a class of
both exempt and nonexempt Ralphs employees. As here, the complaint alleged
that by charging storewide expenses of workers’ compensation, cash shortages,
and merchandise losses against storewide revenues to obtain the store net earnings
figures on which supplementary incentive compensation payments were
calculated, the plan violated sections 221, 400 through 410, and 3751, and
Regulation 11070. The trial court overruled Ralphs’s demurrer. Ralphs sought
mandate, and the Court of Appeal denied relief.
The Ralphs Grocery court observed at the outset that Ralphs had
persuasively demonstrated the beneficial effects of profit-based incentive
compensation plans for both employers and employees. Moreover, after
reviewing Kerr’s Catering, Quillian, and Hudgins, the court acknowledged Ralphs
had shown that, “as a matter of economics, calculation of an incentive bonus based
on profitability by taking into account not only revenues but also store expenses in
accordance with standard accounting principles differs markedly from reducing
(or recapturing) wages through prohibited deductions.” (Ralphs Grocery, supra,
112 Cal.App.4th 1090, 1101.)
Nonetheless, the court in Ralphs Grocery felt compelled to conclude that
the ICP was, in certain respects, illegal. By including workers’ compensation
costs in the formula for calculating the store’s net earnings on which
18
supplementary incentive compensation payments were based, the Court of Appeal
held, Ralphs was taking a deduction from employee wages to cover such costs, in
direct violation of section 3751. Moreover, the court concluded, insofar as the net
earnings calculation took into account cash shortages, breakage, and loss of
equipment not caused by the compensated employee’s dishonesty, willful act, or
gross negligence, the plan violated Regulation 11070 as applicable to nonexempt
employees. This formula, said the court, forced such workers to assume business
costs the law places exclusively upon the employer, and to face the “special
hardship” of uncertain and unanticipated wage deductions.
On the other hand, Ralphs Grocery held, no law prevented consideration of
cash, merchandise, and equipment losses in calculating the supplementary
incentive compensation payments of exempt, or managerial, employees not
covered by Regulation 11070. Neither in letter nor in spirit, said the Court of
Appeal, did such a formula resemble the “recapture” of wages already paid, as
prohibited by section 221, or the exaction of an employee cash bond governed by
sections 400 through 410. (Ralphs Grocery, supra, 112 Cal.App.4th 1090, 1105.)
Kerr’s Catering, the court noted, had suggested that losses of these kinds
were “expenses of management,” thus implying it was appropriate for managerial
employees to bear some of the costs associated with their supervision and
oversight of business operations. Such a system is fair and comports with
common sense, the court observed, because managers have control of business
operations that may affect both revenues and expenses. “At the very least,” said
the court, “it would require a significant extension of the Supreme Court’s dicta
[in Kerr’s Catering] regarding the underlying spirit of the Labor Code provisions
protecting workers’ wages to conclude an incentive compensation plan that
determines an exempt employee’s bonus on a full range of revenue and expense
19
items, including cash shortages, is unlawful.” (Ralphs Grocery, supra,
112 Cal.App.4th 1090, 1106.)8
We entirely agree with this latter observation, but it leads us to conclude,
contrary to Ralphs Grocery, that Ralphs’s ICP is not illegal in any respect. To
paraphrase Ralphs Grocery, the Plan does not resemble, in letter or spirit, the
prohibited deduction, setoff, or recapture of expected wages for the purpose of
saddling employees with prohibited employer costs, as was at issue in Kerr’s
Catering, Quillian, and Hudgins. For similar reasons, the Plan does not produce,
in violation of section 3751, a prohibited direct or indirect deduction or
contribution from employee wages to cover the costs of workers’ compensation.
Plaintiff and his amici curiae are incorrect when they argue that Ralphs’s ICP is
simply a relabeled version of the wage-deduction schemes addressed in Kerr’s
Catering, Quillian, and Hudgins.9
In each of those cases, the employee’s compensation, whether regular or
supplementary, was set, in essence, as a sales commission, i.e., a specified and
promised share of the revenues attributable to that employee’s personal sales or
8
Though Ralphs Grocery did not expressly disagree with Quillian, supra,
96 Cal.App.3d 156, as to the rights of managerial employees, the two decisions are
at odds on the point. Quillian involved a managerial employee, and no
Commission wage order was cited there as a source of her rights. Instead,
Quillian held that the deduction of cash and merchandise losses from a manager’s
incentive pay contravened sections 400-410 and insinuated that it might also
violate section 221.
9
Two amicus curiae briefs were submitted on behalf of plaintiff—one by
Consumer Attorneys of California, and one on the collective behalf of Asian Law
Caucus, Inc., Asian Pacific American Legal Center, Golden Gate Women’s
Employment Rights Clinic, La Raza Centro Legal, Inc., The Legal Aid Society–
Employment Law Center, and Stanford Community Law Clinic. The latter amici
curiae are referred to collectively in the text as Asian Law Caucus, Inc., et al.
Amicus curiae briefs were submitted on behalf of Ralphs by (1) California Grocers
Association and (2) Employers Group and California Law Council.
20
managerial efforts. The set commission was then directly reduced by the full
dollar value of merchandise and cash losses, as determined by the employer, and
regardless of employee fault. The employer thus defrayed its merchandise and
cash losses by charging them, dollar for dollar, against its liability for wages.
Without following the rules for cash bonds, the employer assessed individual
employees the entire unliquidated value of such losses, and did so by withholding
amounts from earned and promised commissions until those commissions fell to
zero. By this means, the employer reduced individual employees’ wages to
increase its own retained profits. This is the practice the statutes, regulations, and
cases have prohibited.
Here, unlike in Kerr’s Catering, Quillian, and Hudgins, no employee was
offered or promised a specified bonus or commission that was based upon, and
immediately measurable by, his or her individual sales or managerial efforts, but
was then subject to deductions to cover employer costs. Instead, under the ICP, all
eligible employees’ supplementary incentive compensation was equally and
collectively premised, at the outset, on store profits, a factor that necessarily
considers the employer’s expenses as well as its income.
Employees understood from the beginning that, by the Plan’s very nature,
supplementary incentive compensation for a particular period depended on the
extent to which the store’s revenues for the relevant period exceeded its operating
expenses, as defined in the Plan. Amounts calculated as a percentage of the
store’s Plan-defined profit were the only “wages” or “earnings” offered or
promised to eligible employees under the Plan. Ralphs took no unauthorized
deductions or contributions, direct or indirect, from the wages so offered or
promised. If there was uncertainty in the amount ultimately due, it arose, not from
employer charge backs taken after the basic Plan wage was determined, but
inherently from the basis on which Plan compensation was awarded.
21
Thus, employees suffered neither a prohibited recapture of compensation
already offered, promised, or paid, nor an uncertain or unanticipated deduction
from expected wages. And because they attained no interest or entitlement in any
supplementary compensation other than that finally calculated under the Plan, they
made no forced “contribution,” direct or indirect, from their own resources to
reimburse Ralphs for costs the law requires the employer to bear alone.
The supplementary incentive compensation promised or offered under the
Plan was collective in nature, intended to promote and reward employee teamwork
that produced a net profit for the store as a whole. This necessarily entailed not
only increasing the store’s overall sales, but reducing its overall costs, including
those arising from workers’ compensation, and losses of cash and merchandise.
The Plan contemplated that this was an effort in which all eligible employees
could and should be involved. To encourage and reward their participation, the
Plan offered them, over and above their regular wages, a proportionate stake in the
successful result.
We cannot conclude that such a supplementary incentive compensation
system, beneficial to both employer and employees (see Ralphs Grocery, supra,
112 Cal.App.4th 1090, 1101), contravenes the wage-protection policies of the
Labor Code and Regulation 11070. Considering the “marked[ ]” economic
difference between Ralphs’s plan and the compensation systems at issue in Kerr’s
Catering, Quillian, and Hudgins (Ralphs Grocery, supra, at p. 1101), a holding
that those decisions govern here would defy reason and common sense.
First, insofar as the law precludes the employer from using wages to shift
business losses to employees, or to make employees the insurers of such losses,
Ralphs did not do so here. Under the ICP, Ralphs absorbed all store costs, and
22
took them as full charges against its own profits. As the Plan specified, Ralphs
then simply determined if there remained any profit to split with its employees.10
Nor did Plan participants become prohibited insurers of Ralphs’s workers’
compensation expenses, or of its cash shortages and merchandise losses, simply
because the level of a store’s expenses in these categories might have the effect of
raising or lowering the wages or earnings ultimately offered or promised to Plan
participants. An employer “may, and usually does,” defray business expenses
either by “pass[ing] these costs on to the consumer . . . or [by] lower[ing] his
employees’ wages proportionately, thus distributing the losses among a wide
group.” (Kerr’s Catering, supra, 57 Cal.2d 319, 329; see Quillian, supra,
96 Cal.App.3d 156, 162; but cf. Hudgins, supra, 34 Cal.App.4th 109 [prohibiting
deductions from the earned commissions of individual employees to reimburse
employer for commissions wrongly paid to others].)11
10
The dissent insists that Ralphs defrayed some of the costs of workers’
compensation, and indirectly passed these defrayed costs through to employees,
insofar as the Plan formula used the amounts Ralphs had expended for workers’
compensation claims to reduce another profit-sapping expense—its payroll. This
offsetting effect arose, the dissent says, because as workers’ compensation
expenses rose, Ralphs’s profits, as calculated under the Plan formula, fell by the
same amount, and Ralphs’s incentive compensation obligations pursuant to the
Plan thus also fell to the extent of the profit-sharing multiplier. By this means, the
dissent asserts, Ralphs avoided its legal responsibility to bear the full brunt of
worker’s compensation expenses, and placed a portion of that burden on
employees through a reduction of their Plan compensation. What the dissent
disregards is that wages under the Plan were calculated, due, and paid only from
what Ralphs had already set aside, after fully absorbing and deducting all
expenses, as its own profit. The fact that workers’ compensation costs affected the
amount of profit Ralphs had available to share with its employees does not mean
Ralphs thereby extracted from them any deduction or contribution, direct or
indirect, to defray worker’s compensation costs.
11
Citing Quillian and Hudgins, plaintiff urges that Ralphs could not evade the
rules against deducting or withholding business losses from wages by using a
formula under which the pertinent wage was determined only after the prohibited
23
Plaintiff cites the policy against subjecting employees to the “special
hardship” of “unanticipated or undetermined” wage fluctuations. (Kerr’s
Catering, supra, 57 Cal.2d 319, 329; Quillian, supra, 96 Cal.App.3d 156, 163.)
Of course, the regular wages paid to Ralphs employees involved no such
hardships. Those wages, in concrete dollar amounts, were promised and paid
regardless of a store’s profit or loss for a specified period. On the other hand, a
supplementary incentive compensation plan based on the financial performance of
the business is by nature fluctuating and uncertain, insofar as the enterprise’s
success, and the sums thus available for distribution under the plan, will vary from
expenses were factored in. The dissent echoes this argument. But the principle
asserted in Quillian and Hudgins must be considered in the context of the facts
there at issue. In those cases, employees were promised commissions set by a
specific formula on the basis of sales volume or revenues generated by their own
individual efforts. Cash and merchandise losses were then assessed against the
employees to reduce these expected wages. The order in which calculations were
performed to achieve that prohibited result was irrelevant. ICP’s such as Ralphs’s
start from the fundamentally different premise that the basic measure of the
compensation due is the overall profitability of the enterprise. By its inherent
nature, such a plan does not promise, or even create, incentive compensation
unless and until profitability occurs and is determined. Quillian and Hudgins
cannot be read for the premise that a plan of this kind fails on grounds the relevant
“profit” is measured, in accordance with common understanding, by subtracting
expenses from revenues.
Contrary to the dissent’s suggestion, nothing we say would require us to
uphold, under any of the laws at issue here, a compensation scheme whereby the
employer promised the employee compensation of “$15 per hour less $3 per hour
for each workers’ compensation claim filed by the employee.” (Dis. opn., post, at
p. 8, fn. 5.) What is promised in that case is a $15 per hour wage. Kerr’s
Catering, Quillian, and Hudgins indicate that the employer cannot then take a
prohibited deduction from the promised wage, even if it announces in advance that
it will do so. Here, by contrast, no supplemental wage, gross or net, was ever
promised except a wage based and calculated, in the first instance, on the store’s
Plan-defined profit, if any. To recognize this fact is not, as the dissent would have
it, simply to manipulate “the point at which to label a payment ‘earnings.’ ” (Dis.
opn., post, at p. 8, fn. 5.)
24
period to period. But this uncertainty alone cannot cause the plan to violate the
wage-protection policies of the Labor Code and Regulation 11070. To hold
otherwise would make every kind of achievement-based supplementary incentive
compensation system, whether based on individual or overall business
performance, illegal.
The wage-protection statutes and rules do not demand that employee
compensation be absolutely certain or stable from pay period to pay period,
regardless of the employees’ contrary understanding. Nor do they forbid a system
in which, even though services have already been performed, the final amount of
wages cannot be determined until after specified contingencies have come to pass.
On the contrary, numerous California cases have held that, where the
parties so understand and agree, final compensation, or at least a portion thereof,
may be contingent on events that occur after the employee has performed service,
and even where he or she has already received advance sums. In such
circumstances, the employer may set off, against future payments, any excess
amounts previously paid. Such a system does not violate section 221’s prohibition
on the employer’s recapture of wages already earned or paid. (E.g., Neisendorf v.
Levi Strauss & Co. (2006) 143 Cal.App.4th 509, 520-523 [section 221 not violated
by incentive compensation plan which, though based on profits for a particular
year, rendered employee who worked that year ineligible for bonus if not still
employed on later date when bonuses were distributed]; Koehl v. Verio, Inc.
(2006) 142 Cal.App.4th 1313, 1329-1337 [employer may charge back sums
advanced on sales commissions, which are not deemed earned until all conditions
precedent thereto have been satisfied]; Steinhebel v. Los Angeles Times
Communications, LLC (2005) 126 Cal.App.4th 696, 704-712 [newspaper could
charge back commission advances to subscription telemarketers where
commission was deemed earned only if subscription was retained for 28 days];
25
Prudential Ins. Co. v. Fromberg (1966) 240 Cal.App.2d 185, 189-193 [system of
paying advances on commissions, then charging back excess when final
commission was determined did not violate section 221]; see Hudgins, supra,
34 Cal.App.4th 1109, 1122 [implying that sales associate could be required,
through chargebacks, to return commissions on his or her own sales that were later
rescinded by reason of customer returns].)
Kerr’s Catering noted the potential for fraud and deceit in a system
whereby unliquidated losses, as unilaterally determined by the employer, are
charged to an individual employee through deductions from wages. But this
concern, when stretched beyond reasonable limits, proves too much. All forms of
employee compensation depend to some degree on the honesty and accuracy of
the employer’s calculations. Certainly this is true of any fluctuating form of
earnings, such as commission-, piece-, or task-based compensation, that relies
primarily on the employer’s recordkeeping.
However, this concern alone does not mean those forms of incentive pay
are forbidden. Similarly, it cannot bar the profit-based ICP at issue here. Indeed,
the potential for deceit seems greater where the employer, claiming specific losses
or shortages, charges them against an individual employee’s pay than where it
distributes, among a group of employees, a share of its profits. We are not
persuaded that Ralphs’s plan is illegal, per se, simply because of the theoretical
possibility–concededly not presented here–that Ralphs might cheat in applying it.
Ralphs observes that plaintiff’s theories would eliminate all profit-based
ICP’s. Plaintiff and amici curiae Asian Law Caucus, Inc., et al. disagree. They
insist Ralphs could, and now does, offer a legal ICP by deleting from the profit
formula workers’ compensation costs, cash and merchandise losses not
attributable to employee fault, and other expenses plaintiff considers to be beyond
employee control, such as third party tort claims. However, as Ralphs suggests, it
26
is difficult to see how plaintiff’s basic premise would not entirely eliminate net
earnings or profits as a legal basis for calculating supplementary incentive
compensation.
It is true that plaintiff’s complaint and arguments focus on particular
categories of employer expenses, such as workers’ compensation costs (citing
section 3751) and cash shortages and merchandise losses (citing Kerr’s Catering,
Quillian, Hudgins, and Regulation 11070). But sections 221 through 224, in
combination with other statutes, establish a public policy against any deductions,
setoffs, or recoupments by an employer from employee wages or earnings, except
those deductions specifically authorized by statute. (See Phillips v. Gemini
Moving Specialists (1998) 63 Cal.App.4th 563, 574.)
Thus if, as plaintiff insists, expenses used to calculate net earnings or
profits for purposes of a supplementary profit-based ICP constitute “deductions”
from wages, an employer presumably may not, for this purpose, subtract from its
revenues such expenses as the utility bill, rent, cost of merchandise sold, or any
other costs the employer actually absorbed before determining its net profit.
In any event, the concept of a supplementary profit-based ICP that may
deduct only some actual expenses, but not others, to derive the figure upon which
payments are calculated is not persuasive. No legal reason appears why, when an
employer chooses or agrees to pay employees, in addition to their regular wages, a
portion of its profits, it must artificially inflate the earnings figure by omitting
expenses that actually reduced those profits.
Nor do plaintiff and his amici curiae demonstrate how such a requirement
would serve the public policy of safeguarding employee wages. As plaintiff’s
counsel conceded at oral argument, Ralphs could compensate for the elimination
of certain expenses from the Plan formula simply by lowering the percentage of
27
the resulting “profit” figure that was payable to employees. (See Kerr’s Catering,
supra, 57 Cal.2d 319, 329.)12 We see nothing in the wage-protection laws, or the
policies they promote, that requires such meaningless figure-juggling.13
Plaintiff, joined by amicus curiae Consumer Attorneys of California,
contends at length that, insofar as Ralphs’ ICP subtracts a store’s workers’
12
As a simple example, assume that Ralphs initially subtracts workers’
compensation costs, cash shortages, and merchandise losses, in addition to other
operating expenses, from store revenues to derive the store profit figure, then
shares 10 percent of the resulting profit, or $10 per $100 of profit, with its
employees. After being advised that inclusion of workers’ compensation costs,
cash shortages, and merchandise losses in the profit calculation is illegal, Ralphs
eliminates those expenses from the formula, thus artificially inflating the final
“profit” figure by 10 percent. To avoid thereby increasing the dollar amount
payable to employees under the ICP, Ralphs could then simply reduce the
employees’ percentage stake in the “profit” from 10 percent to 9.09 percent.
Indeed, if Ralphs failed to lower the employees’ percentage stake under
such circumstances, it would pay a portion of the expenses at issue twice.
Consider the following example: After paying or absorbing such store expenses as
workers’ compensation, cash shortages, merchandise damage or loss, and third
party tort claims, in a total amount of $10,000, Ralphs registers a store profit of
$100,000 for the period, and then, as it has promised to do, shares 10 percent of
that profit, or $10,000, with Plan participants. If the expenses described above
were omitted from the “profit” calculation for Plan purposes, the “profit”
registered would increase from $100,000 to $110,000, and the share payable to
Plan participants, if the promised percentage stake remained the same, would thus
increase from $10,000 to $11,000. In effect, Ralphs would have paid or absorbed
the $10,000 of expenses as a charge against its actual profit, then paid $1,000 of
these expenses again as compensation to Plan participants.
13
The dissent protests that figure-juggling of this sort is not meaningless,
because such a formula would at least remove the “perverse incentive[ ]” for
employees to suppress legitimate workers’ compensation claims in order to boost
the profit figure upon which Plan compensation is calculated. (Dis. opn., p. 12.)
Whether, and to what extent, an incentive to reduce compensation costs is
“perverse” is both debatable and beyond the scope of the issues before us. (See
text discussion, post.) The point here is that whatever incentives the Plan
produced, it did not do so by taking deductions or contributions from employees,
their property, or their wages in violation of law.
28
compensation costs from its revenues to determine the profit on which
supplementary incentive compensation amounts are based, the Plan violates the
policy of the workers’ compensation law by encouraging store employees not to
report valid injury claims for fear of reducing their pay. But one might equally
argue that inclusion of workers’ compensation costs in the profit calculation
promotes the goals of the workers’ compensation system by encouraging
employees to maintain a safe workplace, and by discouraging claim abuse.
(Ralphs Grocery, supra, 112 Cal.App.4th 1090, 1102.)
In any event, as the Ralphs Grocery court recognized, this policy debate is
not for the courts to resolve. (Ralphs Grocery, supra, 112 Cal.App.4th 1090,
1102.) We conclude only that we find nothing in the statutes, regulation, and
cases cited by plaintiff to prohibit Ralphs from offering its employees, over and
above their guaranteed base wages, supplementary incentive compensation on the
basis of store profits that remain after legitimate store expenses, including the
costs of workers’ compensation, have been subtracted from store revenues.14
14
In an effort to show that Ralphs’ incentive compensation formula was not a
legitimate profit-sharing plan, Asian Law Caucus, Inc. et al., argue that Ralphs’s
formula would not qualify, under the Fair Labor Standards Act (FLSA), as a “bona
fide profit-sharing plan,” thus excludable from “regular pay” for purposes of
calculating an employee’s overtime rate. (29 U.S.C. § 207(e)(3).) As amici curiae
note, federal regulations defining a “bona fide profit-sharing plan” for this purpose
exclude plans, among others, in which employer contributions to a fund for
distribution to employees “are based on factors other than profits such as hours of
work, production, efficiency, sales or savings in cost.” (29 C.F.R. § 549.2 (2006).)
As amici curiae further observe, California follows the federal standard for
purposes of determining, under the Labor Code, what constitutes an employee’s
regular pay subject to an overtime rate. (See Huntington Memorial Hospital v.
Superior Court (2005) 131 Cal.App.4th 893, 902-903.) Amici curiae assert that
Ralphs’s was an unqualified plan under these standards insofar as supplementary
incentive compensation payments for a particular store’s employees rose when
their productivity and efficiency increased that store’s revenues and reduced its
operating costs, but fell when the opposite result occurred. Even if amici curiae
are correct that amounts paid out under Ralphs’s plan did not qualify, under
29
Plaintiff argues that, at least with respect to workers’ compensation costs,
the Legislature has resolved the issue by action subsequent to Ralphs Grocery. As
plaintiff observes, soon after Ralphs Grocery was decided, two bills were
introduced in the Senate to add subdivision (c) to section 3751. The proposed
amendment would have specified that use of workers’ compensation costs in the
calculation of profits for purposes of an employee bonus program does not
constitute a deduction from employees’ earnings in violation of the section. (Sen.
Bill No. 6 (2003-2004 4th Ex. Sess.) as introduced Nov. 19, 2003 (Senate Bill No.
6); Sen. Bill No. 1141 (2003-2004 Reg. Sess.) as introduced Jan. 21, 2004 (Senate
Bill No. 1141).)
In each case, plaintiff notes, committee analyses made clear that the
purpose was to overturn Ralphs Grocery insofar as that decision held otherwise.
(See, e.g., Sen. Com. on Lab. & Indus. Relat., analysis of Sen. Bill No. 6, Dec. 1,
2003, pp. 1-2 at <http://info.sen.ca.gov> [as of August 23, 2007]; Sen. Com. on
Lab. & Indus. Relat., analysis of Sen. Bill No. 1141, Apr. 26, 2004, pp. 1-2 at
<http://info.sen.ca.gov> [as of August 23, 2007].) However, both bills died in
committee. (See Sen. Bill No. 6, Complete Bill History at <http://info.sen.ca.gov>
[as of July 19, 2007]; Sen. Bill No. 1141, Complete Bill History at
<http://info.sen.ca.gov> [as of August 23, 2007].)
Plaintiff urges these developments demonstrate that the Legislature
acquiesced in Ralphs Grocery’s construction of section 3751, and that it rejected
efforts to supersede that decision. We disagree. We have often said that mere
legislative inaction is a “weak reed” upon which to rest any conclusion about the
overtime rules, for exclusion from employees’ regular pay—an issue we need not
and do not decide— that issue simply has nothing to do with whether Ralphs was
precluded from offering such a plan under California law.
30
Legislature’s intent. (E.g., Harris v. Capital Growth Investors XIV (1991)
52 Cal.3d 1142, 1156.)
We have sometimes found legislative acquiescence in the construction of a
statute where, over a long period of uniform judicial or administrative treatment,
the Legislature has addressed the law in question on multiple occasions, yet has
not disturbed the settled interpretation. (See, e.g., People v. Salas (2006)
37 Cal.4th 967, 979; Sara M. v. Superior Court (2005) 36 Cal.4th 998, 1014-1015;
In re Dannenberg (2005) 34 Cal.4th 1061, 1091; Olmstead v. Arthur J.
Gallagher & Co. (2004) 32 Cal.4th 804, 816.) On the other hand, we have
declined to base such a conclusion on a bill’s mere failure, as here, to clear
committee in the legislative chamber where it was introduced. (Moradi-Shalal v.
Fireman’s Fund Ins. Companies (1988) 46 Cal.3d 287, 300.) As we have noted,
“failure of the bill to reach the [chamber] floor is [not] determinative of the intent
of the [chamber] as a whole that the proposed legislation should fail.” (Ibid.)
At the time Senate Bills Nos. 6 and 1141 were introduced, only a single
recent Court of Appeal case had considered how section 3751 should apply to
profit-sharing incentive compensation plans. We decline to infer, solely from the
fact these bills died without a floor vote in the Senate, that the Legislature as a
whole accepted the holding of this decision. Many reasons could explain the
Legislature’s failure to consider the bills further, including the press of other
business, political considerations, or a tendency, at least in the short run, to trust
the courts to correct their own errors. (County of Los Angeles v. Workers’ Comp.
Appeals Bd. (1981) 30 Cal.3d 391, 403-404.) The Legislature’s mere inaction on
two hastily presented bills cannot foreclose this court from examining, in the
normal course, the Ralphs Grocery decision and the issues it addressed. Plaintiff’s
claim of legislative acquiescence must be rejected.
31
Therefore, we hold that Ralphs’ profit-based supplementary ICP, designed
to reward employees beyond their normal pay for their collective contribution to
store profits, did not violate the wage protection policies of Labor Code sections
221, 400 through 410, or 3751, or Regulation 11070, insofar as the Plan included
store expenses such as workers’ compensation costs, cash and merchandise
shortages, breakage, and third party tort claims in the profit calculation.15 The
derivative claim of liability under Business and Professions Code section 17200
thus also fails. Accordingly, we will reverse the decision of the Court of Appeal,
which reversed the judgment of dismissal entered after the trial court sustained
Ralphs’s demurrer to plaintiff’s complaint without leave to amend. We will also
disapprove Ralphs Grocery, supra, 112 Cal.App.4th 1090, to the extent it reaches
contrary conclusions.
15
We have found no decisions from other jurisdictions directly on point.
However, the most closely applicable non-California case tends to support our
conclusion here. New York, similarly to California, defines “wages” to include all
“earnings of an employee for labor or services rendered,” including earnings
calculated “on a time, piece, commission or other basis.” (N.Y. Labor Law,
§ 190(1).) The statutes and related regulations protect such “wages” from all
“deductions,” other than those specifically authorized by law, and they specifically
prohibit deductions for, among other things, “spoilage,” “breakage,” and “cash
shortages or losses.” (E.g., N.Y. Labor Law, § 193; N.Y. Comp. Codes R. &
Regs. tit. 12, §§ 137-2.5(a), 138-3.6(a), 141-2.10(a), 142-2.10(a), 142-3.11(a),
190-5.1(a).) In Truelove v. Northeast Capital & Advisory, Inc. (N.Y. 2000)
738 N.E.2d 770, the New York Court of Appeals held that a bonus offered, in
addition to the employee’s regular remuneration, as a “[d]iscretionary . . . share in
a reward to all employees for the success of the employer’s entrepreneurship,” is
not sufficiently linked to the employee’s personal rendition of services to
constitute “wages” within the protection of these statutes and regulations. (Id., at
p. 772.) Ralphs, of course, does not argue here that amounts distributed to
employees under the Plan are not “wages.”
32
DISPOSITION
The judgment of the Court of Appeal is reversed. Ralphs Grocery Co. v.
Superior Court, supra, 112 Cal.App.4th 1090, is disapproved to the extent it
reaches conclusions contrary to the views expressed in this opinion.
BAXTER, J.
WE CONCUR:
GEORGE, C.J.
CHIN, J.
CORRIGAN, J.
33
DISSENTING OPINION BY WERDEGAR, J.
This is a case of statutory interpretation. Labor Code section 37511
prohibits employers from directly or indirectly passing all or any part of their
workers’ compensation costs back to their employees through deductions from
their employees’ compensation. Ralphs Grocery Company, Inc.’s compensation
plan does just that. Whatever this court’s views concerning the reasonableness
and desirability of such plans, judicial notions of policy are irrelevant if the
Legislature’s policy decision, as embodied in the text of the statute, compels a
different result. It does so here. Accordingly, I respectfully dissent.
I
As this case is before us on demurrer, we must accept as true all well-
pleaded allegations in plaintiff Eddy Prachasaisoradej’s second amended
complaint (complaint).
Prachasaisoradej is a Ralphs Grocery Company, Inc. (Ralphs) employee.
He sued Ralphs under the unfair competition law for adopting an employee
compensation plan that, according to the complaint, made compensation partially
contingent on, inter alia, (1) Ralphs’s workers’ compensation costs, and (2) cash
and merchandise shortages. Prachasaisoradej contended the compensation plan
violates section 3751 (barring employer pass-throughs of workers’ compensation
1
All further unspecified statutory references are to the Labor Code.
1
costs), as well as various other Labor Code provisions and a Labor Commissioner
wage order governing employer pass-throughs of cash and merchandise shortages.
The particulars of the plan are not in dispute. Ralphs computes its
employee compensation based in part on a fixed wage and in part on a bonus tied
to store performance compared with projections. Each store has a financial target,
and the employee bonuses for each store are based on how that store does
compared to its target. Under Ralphs’s formula for measuring store performance,
when an employee files a workers’ compensation claim, the expenses for that
claim are charged against the store where the claimant works. Consequently, an
employee’s filing of a workers’ compensation claim reduces the store’s
performance figure and the resulting bonuses employees at that store receive. The
same is true of cash shortages and merchandise losses, which are likewise charged
against a store’s performance figure and reduce its employees’ compensation. The
only question is whether this arrangement is lawful.
II
For purposes of Prachasaisoradej’s workers’ compensation deduction
claim, one statute is central. Section 3751, subdivision (a) provides in part: “No
employer shall exact or receive from any employee any contribution, or make or
take any deduction from the earnings of any employee, either directly or
indirectly, to cover the whole or any part of the cost of [workers’] compensation
. . . .” (Italics added.)
Ralphs does not contest that its bonus plan constitutes “earnings” within the
meaning of section 3751. Thus, the only question under section 3751 is whether
Ralphs’s plan involves a “direct[] or indirect[]” deduction from its employees’
earnings “to cover the whole or any part of the cost of [workers’] compensation.”
(Italics added.) As section 3751 regulates employee wages and working
conditions, it must be broadly construed in favor of ensuring the workers’
2
protections it was intended to guarantee: “[I]n light of the remedial nature of the
legislative enactments authorizing the regulation of wages, hours and working
conditions for the protection and benefit of employees, the statutory provisions are
to be liberally construed with an eye to promoting such protection. . . . ‘They are
not construed within narrow limits of the letter of the law, but rather are to be
given liberal effect to promote the general object sought to be accomplished
. . . .’ ” 2 (Industrial Welfare Com. v. Superior Court (1980) 27 Cal.3d 690, 702;
see also Murphy v. Kenneth Cole Productions, Inc. (2007) 40 Cal.4th 1094, 1103-
1104; Henning v. Industrial Welfare Com. (1988) 46 Cal.3d 1262, 1269; Kerr’s
Catering Service v. Department of Industrial Relations (1962) 57 Cal.2d 319, 330
(Kerr’s Catering) [the “Legislature and our courts have accorded to wages special
considerations” in order to protect the “welfare of the wage earner”]; § 3202
[workers’ compensation scheme, of which § 3751 is a part, should be interpreted
liberally in favor of workers].)
Rudimentary math and economics demonstrate that Ralphs’s plan exacts, at
the least, an indirect deduction from employee compensation for part of Ralphs’s
workers’ compensation costs. Bonuses are calculated on the basis of Ralphs’s
special formula for plan-defined “profit.” That formula includes workers’
compensation costs as a deduction. Thus, if workers’ compensation costs go up,
the performance figure used in the calculation goes down, as does the bonus paid
out. Consequently, each employee’s bonus figure is tied to the employer’s
workers’ compensation costs at the employee’s store; as those costs rise, the
employee suffers a corresponding reduction in compensation.
2
While the majority acknowledges this principle, it does not apply it, and
after citing the language of section 3751 once, never again attempts to discern the
full statutory text’s meaning or address its implications.
3
Granted, the deduction is not dollar for dollar, but the linkage of employee
compensation to the employer’s workers’ compensation costs is direct and
inescapable. Moreover, section 3751’s prohibition is not limited only to dollar for
dollar deductions. It applies even to “indirect[]” deductions to cover “any part” of
the cost of workers’ compensation. (Ibid.) Through its bonus plan, Ralphs allays
a portion of its workers’ compensation costs. If those costs rise $1, its bonus plan
reduces employee compensation by some corresponding amount. Whether it
thereby saves 5 cents or 50 cents on the dollar is immaterial, as the statute makes
no distinction; either is illegal. Ralphs does not have to structure as a bonus plan
any part of the compensation package it offers employees, but if it does, it may not
make compensation contingent on workers’ compensation costs.
Ralphs’s plan directly implicates the rationale behind the statute. The
premise of the workers’ compensation scheme, of which section 3751 is a part, is
that in exchange for relinquishing tort-based remedies for industrial injury,
workers receive the assurance of no-fault compensation from their employers;
conversely, employers in exchange for a shield from tort liability must bear the
cost of injuries suffered by workers in their employ. (Shoemaker v. Myers (1990)
52 Cal.3d 1, 16.) By including workers’ compensation costs in its formula to
measure store performance, Ralphs ensures that any rise in workers’ compensation
costs will be partially allayed by reduced payroll costs, as a portion of the
industrial accident burden is shifted to Ralphs’s employees. The Legislature made
a decision nearly 100 years ago to require employers alone to bear the financial
costs of industrial safety. We should enforce that decision.
The complaint identifies a second way in which Ralphs’s plan undermines
the Legislature’s workers’ compensation scheme. The structure of Ralphs’s plan,
under which the costs of each workers’ compensation claim are charged to that
store’s performance figure, creates a disincentive for injured employees to file
4
even valid claims, as well as an incentive for fellow employees to pressure injured
workers not to file claims. We may reasonably construe section 3751 as intended
to protect against just such consequences. While the majority argues instead that
“inclusion of workers’ compensation costs in the profit calculation [might]
promote[] the goals of the workers’ compensation system by encouraging
employees to maintain a safe workplace, and by discouraging claim abuse” (maj.
opn., ante, at p. 29),3 this is beside the point; as the majority acknowledges, “this
policy debate is not for the courts to resolve” (ibid.)—because the Legislature has
already done so.
The lone case to analyze section 3751 in this context, Ralphs Grocery Co.
v. Superior Court (2003) 112 Cal.App.4th 1090 (Ralphs Grocery), arrived at the
same conclusion: Ralphs’s plan runs afoul of “the plain language and clear
meaning” of section 3751. (Ralphs Grocery, at p. 1102.) “Ralphs’s bonus plainly
constitutes employee ‘earnings’ within the meaning of the statute; and the alleged
deduction for workers’ compensation costs in the bonus calculation is, at the very
least, an indirect means of holding employees responsible for such costs.” (Ibid.,
fn. omitted.)
Section 3751 prohibits the pass-through of workers’ compensation costs in
the broadest possible terms. We are obligated to liberally construe that statute.
Where, as here, a compensation plan both falls afoul of the literal terms of the
statute and directly undermines the legislative goals underlying its adoption, it
violates the statute. Accordingly, Prachasaisoradej has stated a claim.4
3
Perhaps it might. So might simply requiring employees to pay their own
workers’ compensation awards.
4
Arguably, similar principles extend to Ralphs’s deduction of cash and
merchandise shortages in the bonus calculation formula. (See Cal. Code Regs., tit.
8, § 11070 [prohibiting deductions for shortages absent employee malfeasance];
Kerr’s Catering, supra, 57 Cal.2d at pp. 322-323 [sustaining regulation making it
5
III
In reaching its contrary result, the majority appeals to “reason and common
sense” (maj. opn., ante, at p. 22): Why cannot an employer base an employee
bonus plan on its net profits? The answer is because in the limited sense of
“profits” involved in this case, the Legislature has determined it cannot. The
majority avoids this conclusion by focusing on form over function; purporting to
define the moment at which the formal label “wages” or “earnings” attaches, the
majority then asks whether workers’ compensation and other costs are subtracted
before or after that largely arbitrary point, rather than focusing, as the rule of
liberality requires, on whether the actual economic effect of the plan is of a type
the Legislature condemned.
Relying on a series of dictionary definitions, the majority asserts it is only
the final figure that results from Ralphs’s bonus calculation that Ralphs “offered or
promised as compensation for labor performed by eligible employees, and it thus
represented their supplemental ‘wages’ or ‘earnings.’ ” (Maj. opn., ante, at
p. 11.) Accordingly, only this end figure is immune from workers’ compensation
or other deductions; any calculations that precede it simply are not subject to the
restrictions of section 3751 or any similar provision.
unlawful to subtract shortages from wages]; Ralphs Grocery, supra, 112
Cal.App.4th at pp. 1104-1105 [holding unlawful calculation of bonus according to
formula that included deduction for shortages]; Quillian v. Lion Oil Company
(1979) 96 Cal.App.3d 156 (Quillian) [same].) Notwithstanding anything in the
majority’s opinion that might suggest employers are free to take deductions from
employees’ earnings absent an explicit prohibition (see maj. opn., ante, at pp. 19-
20), the Labor Code plainly prohibits employers from taking deductions from
employees’ wages unless specifically authorized. (§§ 221, 224.) However,
analysis of Prachasaisoradej’s section 3751 claim is sufficient to demonstrate that,
as the Court of Appeal correctly concluded, Prachasaisoradej’s complaint should
have survived demurrer. Accordingly, I do not dwell on his remaining claims.
6
California courts have seen this sort of legerdemain before and properly
rejected it. In Quillian, supra, 96 Cal.App.3d 156, as here, the employer offered
its employee a base wage and a bonus. The bonus was calculated based on gas
sales, other sales, and cash or inventory shortages. The employer repeatedly
emphasized in the parties’ agreement that only the final result of this calculation
was a bonus due the employee, and thus no shortages were deducted from the
employee’s bonus. It argued to the court that its bonus plan was a valid way of
creating employee incentives to increase sales and decrease shortages.
The Quillian court saw through this scheme. It recognized that simply
labeling the final result of the calculation as the bonus due the employee did not
immunize the calculation itself from scrutiny; the calculation itself involved a
direct subtraction of shortages from the payment to the employee; and
notwithstanding semantics, “the result is the same. The [employee] carries the
burden of losses from the [business].” (Quillian, supra, 96 Cal.App.3d at p. 163.)
The employer was prohibited by law from using this means to create an incentive
for its workers to reduce shortages.
So too here. Ralphs attached the label of bonus only to the end product of
its calculation. The majority accepts that characterization. In so doing, it ignores
that the result here is the same as in Quillian; the calculation leading up to the
moment when the “bonus” label attaches illegally places on the employees the
burden of workers’ compensation costs. (See Hudgins v. Neiman Marcus Group,
Inc. (1995) 34 Cal.App.4th 1109, 1124 (Hudgins) [employer “cannot avoid a
finding that its . . . policy is unlawful simply by asserting that the deduction is just
a step in its calculation of commission income”].) Here, as in Quillian, this
7
method of computing compensation contravenes the clear statutory rule the
Legislature has adopted against such burden-shifting.5
That the compensation plan may not upset employee expectations
concerning payment, as the majority argues, is not determinative; employee
expectations are but one of the interests protected by the relevant statutes.
Speculation that employee expectations are not disturbed will not insulate from
invalidation a plan that otherwise violates section 3751. In a similar vein, the
majority frames this case as one involving “supplementary compensation,” with
the implication that these payments are made at the grace of the employer and
hence can be calculated any way the employer wishes so long as any deduction
does not drive compensation below the minimum wage. (Maj. opn., ante, at pp. 3,
10 & fn. 5.) But that the compensation is by way of a bonus plan is irrelevant; an
employer cannot, through the device of separating compensation into multiple
parts, insulate its payments from the operative statutes governing unlawful
deductions. (See Kerr’s Catering, supra, 57 Cal.2d at p. 322 [invalidating
unlawful deductions taken from payments made on top of regular wages]; Ralphs
5
The consequence of the majority’s formalistic approach is striking.
Suppose an employer “offer[s] or promise[s] as compensation” to its employees
$15 per hour less $3 per hour for each workers’ compensation claim filed by the
employee. The deduction is made before any amount is offered or promised to the
employee; only the final offered amount constitutes wages; and this method of
calculating wages is thus entirely consonant with the majority’s application of
section 3751. It is not, however, consonant with the Legislature’s intent to leave
workers’ compensation costs with employers, not their employees.
The majority asserts that in this $15 minus $3 hypothetical, the $15 is
actually the promised amount from which no deductions may be taken. (Maj.
opn., ante, at p. 24, fn. 11.) In doing so, it only reinforces that its selection of the
point at which to label a payment “earnings” is arbitrary and a matter of
convenience, not based on any clear legal principle capable of predictable
application.
8
Grocery, supra, 112 Cal.App.4th at p. 1104 [same]; Quillian, supra, 96
Cal.App.3d at pp. 158-159 [same].)
The majority seeks to distinguish the various cases that have long
recognized broad limits on employers’ ability to take certain types of deductions
from employee compensation and thereby pass the costs of doing business directly
back to employees. (E.g., Kerr’s Catering, supra, 57 Cal.2d 319; Ralphs Grocery,
supra, 112 Cal.App.4th 1090; Quillian, supra, 96 Cal.App.3d 156; Hudgins,
supra, 34 Cal.App.4th 1109.) The majority offers essentially three reasons why
the compensation system at issue here differs from those previously found
unlawful. First, it involves no deduction from an amount already promised or
offered; the amount promised or offered is only the bonus, if any, that results from
Ralphs’s calculation. This distinction is no distinction, but rests on the arbitrary
selection of the final calculation of the bonus as the point at which legal protection
against deductions attaches. As noted above, in Quillian as here only the final
bonus amount was promised or offered; the court nevertheless recognized that
legal protections against unlawful deductions applied equally to the formula used
in calculating the offered bonus.
Second, the majority notes that unlike previous cases this plan does not
involve a dollar for dollar deduction, but only a partial deduction. This is a
distinction, but one without a difference. Section 3751 by its terms expressly
prohibits deductions “to cover the whole or any part” of workers’ compensation
costs. What an employer may not do in whole, it may not do in part. (See Ralphs
Grocery, supra, 112 Cal.App.4th at p. 1104.)
Third, the majority contends that unlike in past cases there is no genuine
pass-through of costs; the employer absorbs all costs itself. Although superficially
appealing, this assertion betrays a lack of understanding of the economic effects of
the compensation plan’s structure. That Ralphs initially bears the costs of
9
workers’ compensation is true. In this sense, this case is no different from Kerr’s
Catering, supra, 57 Cal.2d 319, Quillian, supra, 96 Cal.App.3d 156, and Hudgins,
supra, 34 Cal.App.4th 1109, in which the employer likewise initially bore various
costs. But by including workers’ compensation as a deduction in the subsequent
calculation of employee bonuses, Ralphs recaptures a portion of these costs. If
they rise, its payroll falls. For each additional dollar it spends on workers’
compensation, the performance figure for the store where a workers’
compensation claim was made drops by $1, and the bonuses and payroll it must
pay at that store likewise drop, thereby defraying these expenses through reduced
employee compensation. As in Kerr’s Catering, Quillian, and Hudgins, Ralphs
covers expenses the Legislature has determined it should bear by reducing its
calculation of employee compensation. As in Kerr’s Catering, Quillian, and
Hudgins, that practice is illegal.6
The majority salts its opinion with the language of “profits,” repeatedly
referring to the compensation scheme as a profit-based plan. This offers two
rhetorical advantages. First, it affords the plan a presumption of validity, as who
could rightly object to a company sharing its profits with its workers? More to the
point, who could complain if in the absence of profits no bonuses are paid?
Second, it allows the majority to dismiss any asserted statutorily compelled
modifications to Ralphs’s formula as involving the “artificial inflat[ion]” of
profits. (See maj. opn., ante, at p. 28.) At its core, the majority’s position rests on
the belief that a calculation of bonus compensation that includes a workers’
compensation deduction is more just and authentic, and any calculation that
removes that factor is unjust and a distortion of reality.
6
Moreover, even if these cases were distinguishable in any material respect,
none interpreted section 3751, and none offers any basis for reading the broad
language of section 3751 more narrowly than its plain language warrants.
10
In truth, no bonus compensation formula has any inherent claim of virtue or
correctness. In calculating compensation, Ralphs may mix in earnings and costs
however it chooses, adding in those items it desires its employees to increase (e.g.,
sales) and subtracting out or assessing charges for those items it desires its
employees to decrease.7 What Ralphs cannot do in constructing its formula is
include factors the Legislature has decided should play no role in the calculation
of employment compensation. Workers’ compensation is such a factor.
Nor would complying with the law require Ralphs to artificially inflate its profits.
The figure Ralphs uses to calculate employee bonuses is not necessarily a true
profit figure; rather, it is a “plan-defined profit.” But even if it were, in this
context, nothing would be wrong with “artificial inflation,” per se. The figures
Ralphs, or any employer, uses in computing incentive-based compensation are
used for that purpose only; they need not inflate their earnings in public statements
issued to investors or filed with the Securities and Exchange Commission.
As amicus curiae Asian Law Caucus, Inc., correctly notes, employers can
still adopt incentive plans tied to a company’s sales and revenue. They simply
cannot also tie the plan to workers’ compensation costs. If enforcement of section
3751 according to its terms results in a higher base “earnings” figure, thereby
potentially increasing employee compensation, employers may adjust by offering
or negotiating a lower percentage multiplier, e.g., 10 percent of a modified figure
rather than 15 percent of the current figure. This modification is not “meaningless
figure-juggling” (maj. opn., ante, at p. 28), as the majority complains; under one
compensation scheme employees are burdened with a disincentive to file workers’
7
From the complaint, it appears Ralphs is choosing its formula arbitrarily,
building it from the ground up. To the extent its store performance figure may be
loosely based on EBITDA (earnings before income, taxes, depreciation, and
amortization), EBITDA is a non-GAAP (generally accepted accounting principles)
economic measure and may be calculated almost any way Ralphs pleases.
11
compensation claims and have an incentive to pressure their peers not to submit
valid claims; under the other, these perverse incentives disappear.
IV
I do not disagree with the majority that an employer may offer incentives to
employees based on their efforts to increase revenue and to reduce some costs.
The Legislature has made a judgment that workers’ compensation costs may not
be wholly or partially recaptured from employees by docking their compensation
in response to cost increases. Such a financial arrangement turns the workers’
compensation scheme on its head, forcing employees to subsidize their own
insurance against industrial injury, a burden this state has chosen to place
exclusively on employers. We are not at liberty to disturb the Legislature’s
judgment in this regard. I respectfully dissent.
WERDEGAR, J.
WE CONCUR:
KENNARD, J.
MORENO, J.
12
See next page for addresses and telephone numbers for counsel who argued in Supreme Court.
Name of Opinion Prachasaisoradej v. Ralphs Grocery Company, Inc.
__________________________________________________________________________________
Unpublished Opinion
Original Appeal
Original Proceeding
Review Granted XXX 122 Cal.App.4th 29
Rehearing Granted
__________________________________________________________________________________
Opinion No. S128576
Date Filed: August 23, 2007
__________________________________________________________________________________
Court: Superior
County: Los Angeles
Judge: Wendell Mortimer, Jr.
__________________________________________________________________________________
Attorneys for Appellant:
Kumetz & Glick, Law Offices of Stephen Glick, Fred Kumetz, Stephen Glick; Law Offices of Ian Herzog,
Ian Herzog; Daniels, Fine, Israel & Schonbuch, Paul R. Fine, Scott A. Brooks and Craig S. Momita for
Plaintiff and Appellant.
Goldstein, Demchak, Baller, Borgen & Dardarian, Laura L. Ho and Nina Ravin for Asian Law Caucus,
Inc., Asian Pacific American Legal Center, Golden Gate Women’s Employment Rights Clinic, La Raza
Centro Legal, Inc., The Legal Aid Society-Employment Law Center and Stanford Community Law Clinic
as Amici Curiae on behalf of Plaintiff and Appellant.
Evan D. Marshall for Consumer Attorneys of California as Amicus Curiae on behalf of Plaintiff and
Appellant.
__________________________________________________________________________________
Attorneys for Respondent:
Thelen Reid & Priest, Thomas E. Hill, Robert Spagat; Horvitz & Levy, Barry R. Levy and Daniel J.
Gonzalez for Defendant and Respondent.
Gibson, Dunn & Crutcher, Deborah J. Clarke, Elisabeth C. Watson and Lisa A Barr for Employers Group
and California Employment Law Council as Amici Curiae on behalf of Defendant and Respondent.
Littler Medelson, J. Kevin Lilly, Diane Kimberlin and James E. Hart for California Grocers Association as
Amicus Curiae on behalf of Defendant and Respondent.
Counsel who argued in Supreme Court (not intended for publication with opinion):
Scott A. Brooks
Daniels, Fine, Israel & Schonbuch
1801 Century Park East, 9th Floor
Los Angeles, CA 90067
(310) 556-7900
Daniel J. Gonzalez
Horvitz & Levy
15760 Ventura Boulevard, 18th Floor
Encino, CA 91436
(818) 995-0800
Opinion Information
| Date: | Docket Number: |
| Thu, 08/23/2007 | S128576 |
Parties
| 1 | Ralphs Grocery Company, Inc (Defendant and Respondent) Represented by Daniel Joseph Gonzalez Horvitz & Levy 15760 Ventura Boulevard, 18th Floor Encino, CA |
| 2 | Ralphs Grocery Company, Inc (Defendant and Respondent) Represented by Matthew Charles Kane Ralphs Grocery Company P.O. Box 54143 Los Angeles, CA |
| 3 | Prachasaisoradej, Eddy Korkiat (Plaintiff and Appellant) Represented by Scott Ashford Brooks Daniels, Fine, Israel, Schonbuch & Lebovits, LLP 1801 Century Park East, 9th Floor Los Angeles, CA |
| 4 | Prachasaisoradej, Eddy Korkiat (Plaintiff and Appellant) Represented by Stephen Glick Law Offices of Stephen Glick 1055 Wilshire Boulevard, Ste 1480 Los Angeles, CA |
| 5 | Prachasaisoradej, Eddy Korkiat (Plaintiff and Appellant) Represented by Ian Herzog Attorney at Law 233 Wilshire Boulevard, Suite 550 Santa Monica, CA |
| 6 | Prachasaisoradej, Eddy Korkiat (Plaintiff and Appellant) Represented by Fred J. Kumetz Law Offices of Stephen Click 3580 Wilshire Boulevard, Suite 1260 Los Angeles, CA |
| 7 | Asian Law Caucus, Inc. (Amicus curiae) Represented by Nina Avny Rabin Goldstein, Demchak, et al. 300 Lakeside Drive, Suite 1000 Oakland, CA |
| 8 | Asian Law Caucus, Inc. (Amicus curiae) Represented by Laura Luo-Yao Ho Goldstein, Demchak, et al. 300 Lakeside Drive, Suite 1000 Oakland, CA |
| 9 | Asian Pacific American Legal Center (Amicus curiae) Represented by Nina Avny Rabin Goldstein, Demchak, et al. 300 Lakeside Drive, Suite 1000 Oakland, CA |
| 10 | Golden Gate Womens Employment Rights Clinic (Amicus curiae) Represented by Nina Avny Rabin Goldstein, Demchak, et al. 300 Lakeside Drive, Suite 1000 Oakland, CA |
| 11 | La Raza Centro Legal, Inc. (Amicus curiae) Represented by Nina Avny Rabin Goldstein, Demchak, et al. 300 Lakeside Drive, Suite 1000 Oakland, CA |
| 12 | Legal Aid Society Employment Law Center (Amicus curiae) Represented by Nina Avny Rabin Goldstein, Demchak, et al. 300 Lakeside Drive, Suite 1000 Oakland, CA |
| 13 | Stanford Community Law Clinic (Amicus curiae) Represented by Nina Avny Rabin Goldstein, Demchak, et al. 300 Lakeside Drive, Suite 1000 Oakland, CA |
| 14 | Employers Group (Amicus curiae) Represented by Deborah J. Clarke Gibson Dunn & Crutcher, LLP 333 S. Grand Avenue Los Angeles, CA |
| 15 | Employers Group (Amicus curiae) Represented by Elisabeth Carter Watson Gibson Dunn & Crutcher, LLP 333 S. Grand Avenue Los Angeles, CA |
| 16 | California Employment Law Council (Amicus curiae) Represented by Deborah J. Clarke Gibson Dunn & Crutcher, LLP 333 S. Grand Avenue Los Angeles, CA |
| 17 | California Employment Law Council (Amicus curiae) Represented by Elisabeth Carter Watson Gibson Dunn & Crutcher, LLP 333 S. Grand Avenue Los Angeles, CA |
| 18 | Consumer Attorneys Of California (Amicus curiae) Represented by Evan D. Marshall Attorney at Law 233 Wilshire Boulevard, Suite 550 Santa Monica , CA |
| 19 | California Grocers Association (Amicus curiae) Represented by J. Kevin Lilly Littler Mendelson et al. 2049 Century Park East, 5th Floor Los Angeles, CA |
| Disposition | |
| Aug 23 2007 | Opinion: Reversed |
| Dockets | |
| Oct 19 2004 | Petition for review filed by counsel for resp (40k) |
| Oct 27 2004 | Record requested both |
| Oct 28 2004 | Received Court of Appeal record one doghouse |
| Dec 6 2004 | Received Court of Appeal record |
| Dec 6 2004 | Note: Requested remaining volumes by overnight service. |
| Dec 15 2004 | Petition for review granted (civil case) The issue to be briefed and argued is limited to the following: Does an employee bonus plan based on a profit figure that is reduced by a store's expenses, including the cost of workers compensation insurance and cash and inventory losses, violate (a) Business and Professions Code section 17200, (b) Labor Code sections 221, 400 through 410, or 3751, or (c) California Code of Regulations, title 8, section 11070? Votes: George, C.J., Kennard, Baxter, Werdegar, Chin, Brown, and Moreno, JJ. |
| Dec 15 2004 | Letter sent to: counsel re Certification of interested entities or persons. |
| Dec 27 2004 | Association of attorneys filed for: Horvitz & Levy LLP, counsel for respondent (Ralphs Grocery Company), hereby associates Matthew C. Kane as co-counsel. |
| Dec 28 2004 | Certification of interested entities or persons filed by respondent (Ralphs Grocery Co.). |
| Jan 10 2005 | Request for extension of time filed Respondent requesting to Feb. 28, 2005 to file opening brief on the merits. |
| Jan 18 2005 | Extension of time granted to and including Feb. 28, 2005 for respondents to file the opening brief on the merits. |
| Mar 1 2005 | Opening brief on the merits filed by counsel for respondent (Ralphs Grocery Company, Inc.). (timely per rule 40.1(b)) |
| Mar 24 2005 | Request for extension of time filed Counsel for appellant (Eddy Korkiat Prachasaisoradij) requesting a 45 day extension to file answer brief on the merits. |
| Mar 30 2005 | Extension of time granted to 5-16-05 for aplt to file the answer brief on the merits. |
| May 9 2005 | Request for extension of time filed Counsel for appellant (Prachasaisoradij) requesting extension to June 6, 2005 to file answer brief on the merits. |
| May 11 2005 | Extension of time granted to and including June 6, 2005 for appellant to file answer brief on the merits. |
| Jun 7 2005 | Answer brief on the merits filed appellant Eddy Korkiat Prachasaisoradej [rule 40.1] |
| Jun 7 2005 | Request for judicial notice filed (granted case) appellant Eddy Korkiat Prachasaisoradej |
| Jun 20 2005 | Request for extension of time filed Respondent requesting to July 27, 2005 to file reply brief on the merits. |
| Jun 22 2005 | Extension of time granted to and including July 27, 2005 for respondent to file reply brief on the merits. |
| Jul 28 2005 | Reply brief filed (case fully briefed) By counsel for respondent / CRC 40.1(b). |
| Aug 26 2005 | Received application to file Amicus Curiae Brief and request for judicial notice by counsel for Asian Law Caucus Inc. et al., in support of appellant. |
| Aug 26 2005 | Received application to file Amicus Curiae Brief and request for judicial notice by counsel for the Employers Group and the California Employment Law Council in support of respondent. |
| Aug 26 2005 | Received application to file Amicus Curiae Brief Consumer Attorneys of California [in support of appt] |
| Aug 26 2005 | Received application to file Amicus Curiae Brief California Grocers Association [in support of respondent] |
| Aug 30 2005 | Permission to file amicus curiae brief granted Asian Law Caucus Inc. et al. |
| Aug 30 2005 | Amicus curiae brief filed by Asian Law Caucus Inc., Asian Pacific American Legal Center, Golden Gate Women's Employment Rights Clinic, La Raza Centro Legal, Inc., The Legal Aid Society-Employment Law Center, and Stanford Community Law Clinic in support of appellant. Answer due within 20 days. |
| Aug 30 2005 | Request for judicial notice filed (granted case) by amicus curiae Asian Law Caucus Inc. et al., |
| Aug 30 2005 | Permission to file amicus curiae brief granted The Employers Group and The California Employment Law Council. |
| Aug 30 2005 | Amicus curiae brief filed by The Employers Group and The California Employment Law Council in support of respondent. Answer due within 20 days. |
| Aug 30 2005 | Request for judicial notice filed (granted case) by amicus curiae The Employers Group and The California Employment Law Council. |
| Sep 2 2005 | Permission to file amicus curiae brief granted Consumer Attorneys of California |
| Sep 2 2005 | Amicus curiae brief filed by Consumer Attorneys of California in support of appellant. Answer due within 20 days. |
| Sep 7 2005 | Permission to file amicus curiae brief granted California Grocers Association |
| Sep 7 2005 | Amicus curiae brief filed California Grocers Association in support of respondent. Answer due within 20 days. |
| Sep 14 2005 | Request for extension of time filed answers to ac briefs to 10-3-05>>appellant Eddy Korkiat Prachasaisoradej |
| Sep 15 2005 | Request for extension of time filed to file answer to ac briefs by Respondent (Ralphs Grocery Company) to and including October 3, 2005. |
| Sep 20 2005 | Extension of time granted On application of appellant to serve and file the reply to amicus curiae brief by The Employers Group and the California Employment Law Council is extended to and including October 3, 2005 and the time to serve and file the reply to amicus curiae brief by California Grocers Association is extended to and including October 11, 2005. No Further extensions of time will be contemplated. |
| Sep 20 2005 | Extension of time granted On application of respondent to serve and file the reply to amicus curiae briefs is extended to and including October 3, 2005. No further extensions of time will be contemplated. |
| Oct 3 2005 | Response to amicus curiae brief filed to ac briefs of Employers Group & California Law Council>> appellant Eddy Korkiat Prachasaisoradej |
| Oct 4 2005 | Response to amicus curiae brief filed By counsel for Ralphs Grocery Company (CRC 40.1) |
| Oct 11 2005 | Response to amicus curiae brief filed to ac brief of California Grocers Assn>>appellant Eddy Korkiat Prachasaisoradej |
| Feb 15 2007 | Received: letter dated February 12, 2007, alerting the Court to recent appeal decisions California Employment Law Council, amicus curiae Deborah J. Clarke, counsel |
| May 2 2007 | Case ordered on calendar to be argued on Wednesday, June 6, at 9:00 a.m., in Los Angeles |
| May 23 2007 | Change of contact information filed for: Stephen Glick, counsel for appellant Eddy K. Prachasaisoradej |
| Jun 6 2007 | Cause argued and submitted |
| Aug 22 2007 | Notice of forthcoming opinion posted |
| Aug 23 2007 | Opinion filed: Judgment reversed Majority Opinion by Baxter, J. joined by George, CJ., Chin & Corrigan, JJ. Dissenting Opinion by Werdegar, J. -- joined by Kennard and Moreno, JJ. |
| Oct 1 2007 | Remittitur issued (civil case) |
| Oct 11 2007 | Received: Receipt for Remittitur from the Court of Appeal, Second Appellate District, Division Two. |
| Nov 21 2007 | Returned record Four doghouses sent via UPS overnight. |
| Briefs | |
| Mar 1 2005 | Opening brief on the merits filed |
| Jun 7 2005 | Answer brief on the merits filed |
| Jul 28 2005 | Reply brief filed (case fully briefed) |
| Aug 30 2005 | Amicus curiae brief filed |
| Aug 30 2005 | Amicus curiae brief filed |
| Sep 2 2005 | Amicus curiae brief filed |
| Sep 7 2005 | Amicus curiae brief filed |
| Oct 3 2005 | Response to amicus curiae brief filed |
| Oct 4 2005 | Response to amicus curiae brief filed |
| Oct 11 2005 | Response to amicus curiae brief filed |
