244 | 2023 Cal-Peculiarities ©2023 Seyfarth Shaw LLP www.seyfarth.com The statute defines “commission” for these purposes as “compensation paid to any person for services rendered in the sale of such employer’s property or services and based proportionately upon the amount or value thereof.”387 But the following forms of pay do not qualify as “commissions”: (1) short-term productivity bonuses such as those paid to retail clerks, (2) temporary, variable incentive payments that increase, but do not decrease, payment under the written contract, and (3) bonus and profit-sharing plans, unless the employer offered to pay a fixed percentage of sales or profits as pay for work performed. 7.16 Bonuses A bonus is money paid in addition to ordinary salary or wages. The Labor Code does not expressly address bonuses. Courts treat a bonus as a form of wages. Entitlement to a bonus is a matter of contract law, as modified by California statutory law. Courts consider an offer of a bonus as a binding unilateral contract that the employee accepts by beginning performance under the bonus plan. Unless a bonus plan expressly provides otherwise, California bonuses are often treated as earned pro rata and payable, as wages, upon termination. Further, if the reason an employee has not earned a bonus is that the employer has dismissed the employee without cause, then a California court likely would hold that the employee is entitled to a pro rata share of the bonus, on the theory that the employer is at fault for preventing the performance needed to earn the bonus.388 But if a written bonus plan clearly requires the employee to remain employed until a certain date, then an employer can deny the entire bonus if an employee, before that date, voluntarily resigns or is dismissed for good cause.389 7.16.1 Bonuses affected by the employer’s workers’ compensation costs Some employers base bonuses in part on how successfully the company has avoided workers’ compensation costs. Labor Code section 3751, however, forbids an employer to deduct from employee earnings, either directly or indirectly, “to cover the whole or any part of the cost” of workers’ compensation.390 A 2003 Court of Appeal decision (Ralphs I) interpreted section 3751 to mean that workers’ compensation costs must be ignored in the calculation of a profit-based bonus plan.391 This ruling, had it remained in effect, would have invalidated countless traditional profit-based bonus plans, including those for CEOs. But then, in 2007, the California Supreme Court overruled Ralphs I in a decision (Ralphs II) involving the same employer and the same bonus plan.392 Ralphs II holds that traditional bonus systems based on net profits are lawful, even if net profits necessarily reflect workers’ compensation costs together with other business losses. Ralphs II distinguished (a) a profit-based bonus plan from (b) a bonus or commission plan that first promises a payment and then reduces the promised payment to adjust for business losses. The latter plan, Ralphs II explained, would unlawfully charge employees for the company’s cost of doing business.393 A profit-based plan, by contrast, does “not create an expectation or entitlement in a specified wage, then take deductions or contributions from that wage to reimburse [the employer] for its business costs.” Rather, each employee receives, in addition to a guaranteed wage paid regardless of profit, a promised supplemental incentive compensation based on a profit to be calculated for a relevant period of operation. The bonus plan thus does not recapture or deduct from what the employer had originally promised,394 but rather rewards employees’ “cooperative and collective contributions” by giving them a portion of profits that the employer “would otherwise be entitled to retain itself.”395
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