©2023 Seyfarth Shaw LLP www.seyfarth.com 2023 Cal-Peculiarities | 245 Notwithstanding the “reason and common sense” Ralphs II thus invoked, the decision drew the support of just four of the seven justices. The three dissenters protested that the Labor Code must be read liberally in the employee’s favor: “Section 3751 prohibits the pass-through of workers’ compensation costs in the broadest possible terms.”396 The dissenters insisted: “What [the employer] 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.”397 Profit-based bonuses in California thus squeaked by the Supreme Court with a vote of 4-3. 7.16.2 Bonuses affected by cash and merchandise shortages Where bonuses depend on net profits, which depend in turn on such items as theft and cash shortages, plaintiffs have claimed that the bonus calculation amounts to a deduction in violation of section 8 of the Wage Orders. Ralphs I distinguished between nonexempt employees (covered by section 8) and exempt employees (not covered by section 8).398 As to exempt employees, Ralphs I held that California employers lawfully may calculate bonuses using a formula that includes deductions for cash and merchandise shortages, because that calculation appropriately encourages exempt employees to manage the business to increase revenue while minimizing expenses. With regard to nonexempt employees, however, Ralphs I held that the employer’s profit-based bonus calculation would unlawfully require them to bear the costs of management. The California Supreme Court’s Ralphs II decision, which overruled Ralphs I with respect to its interpretation of Labor Code section 3751, also overruled Ralphs I with respect to its view that employers must not deduct cash and merchandise shortages in calculating profits for purposes of a profits-based bonus for nonexempt employees.399 But Ralphs II was a hotly contested, 4-3 decision, and the three dissenting justices, while arguing that the employer unlawfully considered workers’ compensation costs in its profits-based bonus plan, suggested that they would also find unlawful the “deduction of cash and merchandise shortages.”400 7.16.3 Longevity bonuses involving restricted company stock The California Supreme Court, in Schachter v. Citigroup, upheld a voluntary employee incentive compensation plan that permitted employees to take shares of restricted company stock at a reduced price in lieu of receiving a portion of annual cash compensation.401 The plan provided that the stock did not vest unless the employee was still employed on a specified date, and that the employee would forfeit the stock—and the portion of cash compensation that had been paid in the form of the restricted stock—if the employee quit or was dismissed for cause before the vesting date. An employee who took restricted stock and then quit before the vesting date sued to challenge the forfeiture provisions. The employee argued that the forfeiture violated Labor Code requirements that employees be paid all earned, unpaid wages upon termination or resignation, and a Labor Code provision that prohibits agreements that purport to circumvent those requirements. Schachter rejected the employee’s challenge because, according to the terms of the incentive plan, there were no earned, unpaid wages remaining unpaid upon termination of employment. That is, the plan provided a longevity bonus, which was never earned because the employee quit before the relevant date. Even in granting the employer a victory, however, Schachter found it necessary to opine that bonuses, commissions, and other incentive compensation may have to be paid where the worker does not quit but is fired: “If the employee is discharged before completion of all of the terms of the bonus agreement, and there is not valid cause, based on conduct of the employee, for the discharge, the employee may be entitled to recover at least a pro rata share of the promised bonus.” For this proposition Schachter cited no law but rather a DLSE Manual provision and a DLSE opinion letter. Schachter’s dictum did not address how the Supreme Court would interpret a
RkJQdWJsaXNoZXIy OTkwMTQ4