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Rebirth of the Profit-Sharing Plans

In 2003 a California Appellate Court held that Ralphs Grocery Co.’s profit-based incentive plan was invalid insofar as it considered a store’s costs for workers’ compensation when computing the store profit on which the bonus payments were calculated. The court also concluded that the plan was invalid as to nonexempt employees insofar as it factored cash shortages and merchandise damage and loss into the profit calculation. Employers who based incentive pay on company profitability were at risk.

Today, the California Supreme Court overturned Ralphs Grocery Co. v. Superior Court (2003) 112 Cal.App.4th 1090. In the Supreme Court decision (Prachasaisoradej v. Ralphs Grocery Company S128576) the court carefully examined the relevant statutes, regulations and judicial decisions and reached a contrary conclusion. Since Ralphs incentive pay plan did not create an expectation or entitlement in a specified wage then take deductions or contributions from that wage to reimburse Ralphs for its business costs, the Supreme Court had no problems allowing the plan. Regardless of store performance employees received their promised wages (salary or an hourly wage) and employees were entitled to the additional compensation only if the store met pre-defined profit requirements within specified periods. The employee was not entitled to the incentive pay if the store did not meet the pre-defined profit requirements, therefore the company did not deduct money the employee’s wages because the employee had not earned the wages.

The court distinguished itself from prior cases such as Quillian and Hudgins on the grounds that the prior cases dealt with employees who were promised commissions based on sales volume or revenues generated by their own individual efforts and then had money deducted from the commissions for losses or shortages not caused by the employee.

After the appellate court decision, many employers eliminated their profit-sharing plans, making it more difficult to attract and retain quality personnel. Other employers at least modified their profit-sharing plans so that workers’ compensation and losses and breakages not attributable to employee fault were left out of the equation. This oftentimes created an accounting nightmare. Employers can now reintroduce appropriate profit-sharing plans and continue to attract and retain quality personnel.

If you have a profit-sharing plan, or are considering implementing one, you should speak with an attorney familiar with the new Supreme Court decision

The Law Office of Phillip J. Griego
95 South Market Street, Suite 520
San Jose, CA 95113
Tel. 408-293-6341
Original article by Robert E. Nuddleman, former associate of The Law Office of Phillip J. Griego.

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Phillip J. Griego represents employees and businesses throughout Silicon Valley and the greater San Francisco Bay Area including Palo Alto, Menlo Park, Mountain View, Los Altos, San Jose, the South Bay Area, Campbell, Los Gatos, Cupertino, Morgan Hill, Gilroy, Sunnyvale, Santa Cruz, Saratoga, and Alameda, San Mateo, Santa Clara, San Benito, Mendocino, and Calaveras counties.