CA Supreme Court Says Employer Can Reduce Incentive Comp by Expenses

August 24, 2007 ( - The California Supreme Court has ruled that incentive compensation plans that use calculations based on profits can subtract out certain expenses that are beyond an employee's control.

The Insurance Journal reports that the court pointed out in its opinion that under the incentive compensation plan of Ralph’s Grocery Co. all eligible employees’ supplementary incentive compensation was equally and collectively premised on store profits which necessarily considers the employer’s expenses as well as its income. The state high court determined the plan does not violate the Labor Code by a prohibited direct or indirect deduction or contribution from employee wages to cover the costs of workers’ compensation.

The court acknowledged that the plaintiff, backed by friend of the court Consumer Attorneys of California, contended that by subtracting a store’s workers’ compensation costs from its revenues to determine the profit on which supplementary incentive compensation amounts are based, the plan violated the policy of the workers’ compensation law by encouraging store employees not to report valid injury claims for fear of reducing their pay.

But, the court said it could equally be true that the plan promotes the goals of the workers’ compensation system by encouraging employees to maintain a safe workplace and by discouraging claim abuse.

According to the Insurance Journal, Eddy Korkiat Prachasaisoradej, who was a produce manager in a Ralphs store, filed a complaint on behalf of himself and other similarly situated employees that their earnings in the store’s incentive compensation plan figures were illegally reduced when the store subtracted out expenses for cash shortages, damaged or lost merchandise, workers’ compensation, tort claims by non-employees, and other business expenses that were “not caused by the willful or dishonest act(s) or gross negligence of’ the individual employees whose compensation was thereby diminished.” The employees sought injunctive relief, restoration of lost wages, interest and attorney fees.

Ralphs argued that “incentive compensation, paid over and above the regular wage, and openly contingent on the 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,” court documents said, according to the Insurance Journal.

The opinion in Eddy Korkiat Prachasaisoradej v. Ralphs Grocery Co. Inc. is here .