Court Rules Workers’ Comp Costs Can Be Tallied in Incentive Compensation

By | August 24, 2007

The California Supreme Court has ruled that incentive compensation plans, calculated on profits, can subtract out costs for workers’ compensation costs from profits, even if it discourages employees from reporting workplace injuries.

In Eddy Korkiat Prachasaisoradej v. Ralphs Grocery Co. Inc., Prachasaisoradej, who was a produce manager in a Ralphs store, filed a complaint on behalf of himself and other similarly situated employees that their earnings in the store’s incentive compensation plan figures were illegally reduced when the store subtracted out expenses for cash shortages, damaged or lost merchandise, workers’ compensation, tort claims by nonemployees, and other business expenses beyond the employees’ control. In the complaint, the employees sought injunctive relief, restoration of lost wages, interest and attorney fees for violating wage-protection rules set fort in the Labor Code. The plaintiff said the expenses subtracted out were ‘not caused by the willful or dishonest act(s) or gross negligence of’ the individual employees whose compensation was thereby diminished,” and therefore should not be calculated expenses.

Ralphs, on the other hand, “asserted that incentive compensation, paid over and above the regular wage, and openly contingent on the achievement of profitability goals, as profitability is normally defined, does not constitute an improper charge against, or deduction from, wages in violation of the Labor Code,” according to court documents.

Ultimately, the court ruled that Ralph’s ICP Plan “does not resemble, in letter or spirit, the prohibited deduction, setoff, or recapture of expected wages for the purpose of saddling employees with prohibited employer costs … The plan does not produce,in violation of section 3751, a prohibited direct or indirect deduction or contribution from employee wages to cover the costs of workers’ compensation.”

Furthermore, the court noted that “under the ICP, all eligible employees’ supplementary incentive compensation was equally and
collectively premised, at the outset, on store profits, a factor that necessarily considers the employer’s expenses as well as its income.”

“Ralphs took no unauthorized deductions or contributions, direct or indirect, from the wages so offered or promised,” the court concluded.

The court acknowledged that “the plaintiff, joined by amicus curiae Consumer Attorneys of California, contended at length that, insofar as Ralphs’ ICP subtracts a store’s workers’ compensation costs from its revenues to determine the profit on which supplementary incentive compensation amounts are based, the Plan violates the policy of the workers’ compensation law by encouraging store employees not to report valid injury claims for fear of reducing their pay.” However, “one might equally argue that inclusion of workers’ compensation costs in the profit calculation promotes the goals of the workers’ compensation system by encouraging employees to maintain a safe workplace, and by discouraging claim abuse,” the court said.

To view the court case, visit www.courtinfo.ca.gov/opinions/documents/S128576.PDF.

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