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LOS ANGELES � Lawyers in California expect more employers to set up profit-based bonus plans for their workers after the state Supreme Court found them last month to be legal. The legality of such plans, which grant compensation based on an employer’s profits, has remained in question since a state appellate court ruling found them illegal in a separate case in 2003. In that case, the appellate court found that the plans violate California law in deducting certain expenses, such as workers’ compensation, from employee wages. Last month’s decision by the California Supreme Court rejected that reasoning. The court found that in deducting expenses from revenues in order to determine profits, the employer did not “shift those costs to employees.” Prachasaisoradej v. Ralphs, No. S128576 (Calif. Aug. 23, 2007). The ruling allows employers to set up profit-based bonus plans in California without fear of litigation. “There is a renewed willingness on the part of employers to consider these kinds of profit-based incentive plans because they feel they can implement them successfully without getting sued,” said James Morris, chairman of the employment law department at Rutan & Tucker in Costa Mesa, Calif. But Scott A. Brooks, a partner at Los Angeles-based Daniels, Fine, Israel, Schonbuch & Lebovits who represented plaintiffs in this Ralphs case and one that led to the 2003 decision, said the recent ruling reinstates concerns that employees are pressured not to bring workers’ compensation claims for fear the increased costs could affect their bonuses. “Concerns like that led us to bring the litigation in the first place,” Brooks said. Holding employees ‘responsible’ Employment lawyers said companies, particularly retailers, set up profit-based bonus plans to foster a sense of teamwork among employees. But in 2003, a state appellate court found that deducting workers’ compensation from an employee’s wages was, in fact, “an indirect means of holding employees responsible for such costs.” Ralphs Grocery Co. v. Superior Court, 112 Cal. App. 4th 1090 (2003). The case involved David Swanson, a former store manager at Ralphs who claimed that his employer’s deductions for workers’ compensation, and merchandise and cash shortages, violated California’s Labor Code, which prohibits unlawful deductions from employee earnings. One section of the Labor Code specifically forbids the deduction of workers’ compensation from employee wages. Since the Swanson ruling, employment lawyers said many companies have changed their bonus plans. “Essentially, they just took out from the profit calculation workers’ comp costs and cash shortages and paid a lower percentage to employees,” said John Battenfeld, a partner in the Los Angeles office of Morgan, Lewis & Bockius. The California Supreme Court declined to review the Swanson case. Fundamental difference The case the California Supreme Court opted to review involved a produce manager at Ralphs, Eddy Korkiat Prachasaisoradej, who sued over the same bonus plan at issue in the Swanson case. In the recent case, the plaintiffs relied on a string of previous court decisions that found various types of expenses, such as merchandise and cash shortages, were illegal deductions from an employee’s wages. But the Supreme Court, in a 4-3 ruling, distinguished those cases from the recent one in noting that the bonuses at the other companies were fixed amounts from which expenses were deducted dollar for dollar. “There is a fundamental difference between an employer’s deducting certain expenses from an employee’s earned wages, which is illegal, and an employer deducting those expenses from gross revenues to determine profit for purposes of calculating a profit-based bonus,” said Tom Hill, a partner in the Los Angeles office of Thelen Reid Brown Raysman & Steiner who represented Ralphs in the Supreme Court and Swanson cases. Brooks said the ruling didn’t take into account certain facts of the Ralphs plan, such as employees receiving monthly updates on their bonus values.

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