Prachasaisoradej v. Ralphs Grocery Co.

• Citation: 42 Cal.4th 217,64 Cal.Rptr.3d 407,165 P.3d 133
• Decision Date: 23 August 2007
• Docket Number: No. S128576.,S128576.
• Court: United States State Supreme Court (California)
• Parties: Eddy Korkiat PRACHASAISORADEJ, Plaintiff and Appellant, v. RALPHS GROCERY COMPANY, INC., Defendant and Respondent.

64 Cal.Rptr.3d 407

42 Cal.4th 217

165 P.3d 133

Eddy Korkiat PRACHASAISORADEJ, Plaintiff and Appellant, v. RALPHS GROCERY COMPANY, INC., Defendant and Respondent.

No. S128576.

Supreme Court of California.

August 23, 2007.

Kumetz & Click, Law Offices of Stephen Glick, Fred Kumetz, Stephen Glick, Los Angeles; Law Offices of Ian Herzog, Ian Herzog, Santa Monica; Daniels, Fine, Israel & Schonbuch, Paul R. Fine, Scott A. Brooks and Craig S. Momita, Los Angeles, for Plaintiff and Appellant.

Goldstein, Demchak, Bailer, Borgen & Dardarian, Laura L. Ho, Oakland, and Nina Ravin, for Asian Law Caucus, Inc., Asian Pacific American Legal Center, Golden Gate Women's Employment Rights Clinic, La Raza Centro Legal, Inc., The Legal Aid Society-Employment Law Center and Stanford Community Law Clinic as Amici Curiae on behalf of Plaintiff and Appellant.

Evan D. Marshall, for Consumer Attorneys of California as Amicus Curiae on behalf of Plaintiff and Appellant.

Thelen Reid & Priest, Thomas E. Hill, Los Angeles, Robert Spagat, San Francisco; Horvitz & Levy, Barry R. Levy and Daniel J. Gonzalez, Encino, for Defendant and Respondent.

Gibson, Dunn & Crutcher, Deborah J. Clarke, Elisabeth C. Watson, Los Angeles, and Lisa A Barr, for Employers Group and California Employment Law Council as Amici Curiae on behalf of Defendant and Respondent.

Littler Medelson, J. Kevin Lilly, Diane Kimberlin and James E. Hart, Irvine, for California Grocers Association as Amicus Curiae on behalf of Defendant and Respondent.

BAXTER, J.

We confront a significant question of California wage law. Defendant Ralphs Grocery Company, Inc. (Ralphs), a supermarket chain, implemented a written incentive compensation plan (ICP or Plan) whereby certain employees of each store were eligible to receive, over and above their regular wages, supplementary sums based upon how the store's actual Plan-defined profits, if any, for specified periods compared with preset profitability targets. For both target and actual purposes, profits were determined by subtracting store operating expenses from store revenues. Plaintiff claims the Plan's formula for calculating these supplemental profit-sharing payments thus violated California statutes, rules, and decisions that prohibit an employer from shifting certain of its costs to employees by withholding, deducting, or recouping them from wages or earnings, or otherwise obliging employees to contribute to them.

Labor Code section 221¹ provides that, except for deductions expressly authorized by state or federal law (see § 224), an employer may not "collect or receive from an employee any part of wages theretofore paid." Section 3751, subdivision (a) prohibits an employer from "exacting] or receiving] ... any employee ... contribution," or "tak[ing] any deduction from [employee] earnings . .., either directly or indirectly, to cover the whole or any part the cost of [workers'] compensation." Case law has interpreted various provisions of the Labor Code, and regulations issued thereunder, as prohibiting deductions from an employee's stated wage to cover certain of the employer's business costs, such as cash and merchandise losses not caused by the employee's dishonesty, or his willful or grossly negligent act. A wage order of the Industrial Welfare Commission (Commission) expressly forbids such deductions and charges against the wages of so-called nonexempt employees in the mercantile industry. (Cal.Code Regs., tit. 8, § 11070, subd. 8 (Regulation 11070).)

Deeming its decision compelled by prior case law, by section 3751, and by Regulation 11070, the Court of Appeal in Ralphs Grocery Co. v. Superior Court (2003) 112 Cal.App.4th 1090, 5 Cal.Rptr.3d 687 (Ralphs Grocery) held that the profit-based supplementary ICP we consider here was invalid insofar as it considered a store's costs for workers' compensation when computing the store profit on which Plan payments were calculated. Moreover, Ralphs Grocery concluded, the Plan was invalid as to nonexempt employees insofar as it factored cash shortages and merchandise damage and loss into the profit calculation. By doing so, Ralphs Grocery reasoned, the Plan effectively charged back a portion of such costs to employees through deductions from their wages.

On the authority of Ralphs Grocery, the instant Court of Appeal reversed a trial court judgment for Ralphs, entered after Ralphs's demurrer to plaintiffs complaint was sustained without leave to amend. We must now decide whether these latter decisions are correct.

After a careful examination of the relevant statutes, regulation, and judicial decisions, we reach a result largely contrary to the holdings of Ralphs Grocery and the instant Court of Appeal. As we will explain, nothing in those authorities suggests that an employer violates California wage-protection laws by providing, as Ralphs did, supplementary compensation designed to reward employees, over and above their regular wages, if and when their collective efforts produced a positive financial result for the store where they worked.

As described in plaintiffs complaint, the ICP did not create an expectation or entitlement in a specified wage, then take deductions or contributions from that wage to reimburse Ralphs for its business costs. At the outset, all Plan participants received, regardless of the store's performance, their guaranteed normal rate of pay—the dollar wage they were promised and expected as compensation for carrying out their individual jobs. Over and above this regular wage, participants in the Plan understood that their collective entitlement to incentive compensation payments, and the amounts thereof, arose only under a formula that compared the store's actual Plan-defined profit, if any, for a specified period, with target figures previously set by the company. Once the amount of an employee's ICP compensation was calculated under this formula, Ralphs did not reduce it by taking unauthorized deductions, contributions, or charges.

The Plan was not illegal, we conclude, simply because, pursuant to normal concepts of profitability, ordinary business expenses, such as storewide workers' compensation costs, and storewide cash and merchandise losses, were figured in, along with such other store expenses as the electric bill and the cost of goods sold, to determine the store's profit, upon which the supplementary incentive compensation payments were calculated. By doing so, Ralphs did not illegally shift those costs to employees. After fully absorbing the expenses at issue, Ralphs simply determined what remained as profits to share with its eligible employees in addition to their normal wages.

In sum, we are persuaded that the reasoning of Ralphs Grocery is flawed, and the authorities on which that decision relied are distinguishable. Ralphs's ICP, as described in plaintiffs complaint, was not illegal on the grounds plaintiff asserts. We will therefore reverse the instant Court of Appeal judgment.

FACTS AND PROCEDURAL BACKGROUND

In 2001, plaintiff, a produce manager in a Ralphs store, filed original and first amended complaints against Ralphs, on behalf of himself and other similarly situated Ralphs employees. The complaints alleged that, in addition to their regular wages, the relevant employees were paid supplementary compensation calculated on the basis of the net earnings of the store where they worked, and that the pertinent earnings figures were reduced—illegally for this purpose—by the store's expenses for cash shortages, damaged or lost merchandise, workers' compensation, tort claims by nonemployees, and other business expenses beyond the employees' control.

This formula, the complaints asserted, violated wage-protection rules set forth in Labor Code sections 221, 400 through 410, and 3751, Regulation 11070, and associated cases, and was thus an unfair business practice prohibited by 17200 of the Business and Professions Code. The complaints sought injunctive relief, restoration of lost wages, interest, and attorney fees.

Ralphs removed the case to federal court on grounds that plaintiffs compensation, including the incentive portion thereof, was governed by his union's collective bargaining agreement (CBA), and that the state-law claims were thus preempted by section 301 of the Labor Management Relations Act (LMRA) (29 U.S.C. § 185(a).) On plaintiffs motion, the district court remanded the case, finding that no federal question was presented, because the claims arose under state law independent and irrespective of the CBA.

Following the remand, plaintiff filed a second amended complaint for himself and an alleged class of Ralphs employees covered by the Plan. This complaint alleged, as before, that the incentive compensation payments were calculated on the basis of the respective net earnings of the store where the covered employees worked, and that the net earnings figures used for this purpose were derived by subtracting, among other expenses, "workers' compensation claims and/or other losses" such as cash shortages, merchandise shortages or shrinkage, and the costs of nonemployee tort claims, "not caused by the willful or dishonest act(s) or gross negligence of the individual employees whose compensation was thereby diminished.

"Through this method of compensation," the second amended complaint asserted, Ralphs "wrongfully deduct[s] expenses from the wages of [its] employees, including [p]laintiff, which expenses the law requires . .. to be borne by the ... employed ], In other words, [the employees] are forced to carry the burden of losses from their respective stores in violation of Labor Code sections 221, 400 through 410, and 3751, Business and Professions Code section 17200, and Regulation 11070. The complaint sought injunctive relief, class-wide lost wages according to proof, waiting time penalties, damages, disgorgement of wrongful profits, and fees and costs.

Ralphs demurred to the second amended complaint on grounds...