California Changes The Rules For Profit-Based Employee Incentive Benefits

On February 18, 2004, the California Supreme Court let stand a lower-court decision that calls into question the lawfulness of many profit-based employee bonus plans. Under the decision in Ralphs Grocery Co. v. Superior Court, 112 Cal. App. 4th 1090 (2003), any plan that is based on net profits is unlawful to the extent that such profits are calculated after accounting for routine costs of doing business such as workers' compensation costs, cash shortages, inventory shrink, or equipment breakage. While the decision turns on an overly rigid interpretation of California law, makes no economic sense, and will increase the cost of doing business in California, the Supreme Court's (in)action means that Ralphs is at present the law in California.