Ralphs Grocery Co. v. Superior Court

• Decision Date: 23 October 2003
• Docket Number: No. B168257.,B168257.
• Citation: 5 Cal.Rptr.3d 687,112 Cal.App.4th 1090
• Court: California Court of Appeals Court of Appeals
• Parties: RALPHS GROCERY COMPANY, Petitioner, v. The SUPERIOR COURT of Los Angeles County, Respondent; David Swanson, Real Party in Interest.

5 Cal.Rptr.3d 687

112 Cal.App.4th 1090

RALPHS GROCERY COMPANY, Petitioner, v. The SUPERIOR COURT of Los Angeles County, Respondent David Swanson, Real Party in Interest.

No. B168257.

Court of Appeal, Second District, Division 7.

October 23, 2003.

As Modified on Denial of Rehearing November 13, 2003.

Review Denied February 18, 2004.

Thelen Reid & Priest, Thomas E. Hill, Los Angeles, Robert Spagat, San Francisco and Matthew C. Kane, Beverly Hills, for Petitioner.

No appearance for Respondent.

Kumetz & Glick, Fred Kumetz, Los Angeles, and Stephen Glick; Law Offices of Ian Herzog and Ian Herzog, Santa Monica; Daniels, Fine, Israel & Schonbuch, Paul R. Fine and Scott A. Brooks, Los Angeles, for Real Party in Interest.

PERLUSS, P.J.

Deducting cash and inventory shortages from the sales commissions otherwise earned by the driver of a sandwich truck is unlawful. (Kerr's Catering Service v. Department of Industrial Relations (1962) 57 Cal.2d 319, 19 Cal.Rptr. 492, 369 P.2d 20 (Kerr's); see Cal.Code Regs., tit. 8 §§ 11040, subd. 8, 11070, subd. 8.) Does the same legal principle prohibit a large corporate retailer from implementing an incentive compensation plan for managerial store-level employees in which the amount of the incentive bonus is based on the achievement of store sales and profitability goals? The trial court held it did. We agree, but only in part.

To the extent the bonus calculation includes expense items the Legislature or the Industrial Welfare Commission has declared may not be charged to an employee (deductions for any part of the cost of workers' compensation claims or cash shortages for nonexempt employees), such a bonus plan is unlawful. However, other expense items, even those beyond the individual manager's direct control, may lawfully be considered in profit-based bonus programs, which can serve as an effective economic incentive to managerial level employees to maximize company profit by increasing revenue and minimizing expenses. Because the complaint in this case alleges the bonus plan adopted by Ralphs Grocery Company includes deductions for expenses within the first prohibited category, it states causes of action for unlawful deductions from wages and unlawful business practices. Accordingly, the trial court properly overruled Ralphs's demurrer.

FACTUAL AND PROCEDURAL BACKGROUND

David Swanson, a former store manager at a Ralphs grocery store, filed a lawsuit individually and as a putative class representative alleging Ralphs is violating the Labor Code and an Industrial Welfare Commission (Commission) wage order for nonexempt employees and committing unlawful business practices by basing its incentive compensation, or bonus, program for store managers and other employees on the net earnings of a store.¹ According to the complaint, Ralphs is "wrongfully deducting] expenses from the wages of their employees, including [Swanson], which expenses the law requires ... to be borne by ... employers. In other words, [Swanson and the class he proposes to represent] are forced to carry the burden of losses from their respective stores in violation of California law."²

Swanson alleges causes of action for: (1) unlawful deductions from earnings in violation of Labor Code sections 221, 400 to 410 and 3751³ and California Code of Regulations, title 8, section 11070, subdivision 8; (2) unlawful and unfair business practices pursuant to Business and Professions Code section 17200; and (3) failure to pay wages upon discharge in violation of section 201. Swanson seeks damages, injunctive relief, disgorgement of profits, penalties, attorney fees and costs.

Ralphs demurred to the complaint on the ground Swanson could not state a cause of action because its bonus plan is not unlawful and a good faith dispute exists as to whether Ralphs failed to pay Swanson all wages due upon discharge. According to Ralphs, its method of calculation with deductions for business losses and expenses is lawful because the bonus is paid in addition to the employees' regular wages and the deductions are simply part of the formula to calculate the bonus, not impermissible deductions from amounts already paid or due to the employees.

The trial court overruled the demurrer, relying on Quillian v. Lion Oil Company (1979) 96 Cal.App.3d 156, 157 Cal.Rptr. 740 (Quillian), in which the Court of Appeal had applied Kerr's to hold an employer could not lawfully calculate a "bonus" for its employees by using a formula that deducted business losses from a percentage commission on products sold. Because Ralphs's bonus constituted "wages" as defined by the Labor Code, under Quillian Swanson's allegation that Ralphs's calculation method required its employees to bear the burden of business losses and expenses including cash shortages, merchandise shortages and shrinkage and workers' compensation costs was sufficient to withstand demurrer. As to the fourth cause of action for failure to pay wages upon discharge, the court ruled Swanson had sufficiently pleaded a willful failure to pay wages to former employees in violation of section 201.

After Ralphs petitioned this court for a writ of mandate compelling the trial court to vacate its order, we issued an order to show cause why the requested relief should not be granted.⁴

DISCUSSION

1. Standard of Review

"The standard of review for an order overruling a demurrer is de novo. The reviewing court accepts as true all facts properly pleaded in the complaint in order to determine whether the demurrer should be overruled. [Citation.]" (Casterson v. Superior Court (2002) 101 Cal. App.4th 177, 182-183, 123 Cal.Rptr.2d 637; see also Mack v. Soung (2000) 80 Cal. App.4th 966, 971, 95 Cal.Rptr.2d 830 [all properly pleaded allegations deemed true, regardless of plaintiffs ability to later prove them].) We liberally construe the pleading with a view to substantial justice between the parties. (Code Civ. Proc, § 452; Kotlar v. Hartford Fire Ins. Co. (2000) 83 Cal.App.4th 1116, 1120, 100 Cal. Rptr.2d 246.) We do not, however, assume the truth of the legal contentions, deductions or conclusions; questions of law, such as the interpretation of a statute, are reviewed de novo. (Aubry v. Tri-City Hospital Dist. (1992) 2 Cal.4th 962, 967, 9 Cal.Rptr.2d 92, 831 P.2d 317; Rudd v. California Casualty Gen. Ins. Co. (1990) 219 Cal.App.3d 948, 951, 268 Cal.Rptr. 624.)

2. Governing Law

a. The Statutes and Wage Order

i. Section 221

Section 221 provides, "It shall be unlawful for any employer to collect or receive from an employee any part of wages theretofore paid by said employer to said employee." "`Wages' includes all amounts for labor performed by employees of every description, whether the amount is fixed or ascertained by the standard of time, task, piece, commission basis, or other method of calculation." (§ 200.) "Section 221 was enacted in order to prevent employers from utilizing secret deductions or kickbacks to pay employees less than their stated wages." (Finnegan v. Schrader (2001) 91 Cal.App.4th 572, 584, 110 Cal.Rptr .2d 552, citing Kerr's, supra, 57 Cal.2d at p. 328, 19 Cal.Rptr. 492, 369 P.2d 20.) Through section 221 and related statutes, the Legislature has recognized "there is in this state a fundamental and substantial public policy protecting an employee's wages." (Phillips v. Gemini Moving Specialists (1998) 63 Cal.App.4th 563, 574, 74 Cal.Rptr.2d 29; see § 224 [allowing employer to deduct from employee, with prior written authorization, insurance premiums, hospital or medical dues and other amounts allowed pursuant to state or federal law].)

ii. Sections 400 to 410

Sections 400 to 410 provide the limited circumstances under which an employer can exact a cash bond from its employee and the protections afforded to an employee when such bonds are permitted. "The very design and purpose of the statutes ... was to forestall a very real danger of fraud, and embezzlement, as well as danger of misappropriation of the funds of an employee deposited with an employer in trust. The self-evident purpose of the legislation ... is to protect that larger portion of the public who are employees and who, in many instances, are forced through economic necessity to find employment by meeting whatever requirements are set by a prospective employer. Under such conditions, employer and employee do not deal on an equal footing, and the force of economic conditions opens the way for fraudulent practices which the [bond] legislation ... seeks to abate." (People v. Vandersee (1956) 139 Cal.App.2d 388, 390-391, 294 P.2d 77 [rejecting constitutional challenge to bond statutes].)

iii. Section 3751

Section 3751, subdivision (a), relating to workers' compensation specifically, provides, "No employer shall exact or receive from any employee any contribution, or make or take any deduction from the earnings of any employee, either directly or indirectly, to cover the whole or any part of the cost of compensation under this division [on workers' compensation and insurance]." Under this section, courts have prohibited employers from using an employee's earnings to contribute to or offset the cost of workers' compensation. (See, e.g., Wesley v. Board of Pension Commissioners (1981) 119 Cal.App.3d 471, 474, 174 Cal.Rptr. 75 ["It has been held that section 3751 prohibits a municipal employer from offsetting the entire amount of workers' compensation benefits against its pension liability when the pension is funded by employee deductions"].)

iv. California Code of Regulations, Title 8, Section 11070

Section 1173 authorizes the Commission to promulgate orders regulating wages, hours and working conditions throughout the state. (Monzon v. Schaefer Ambulance Service, Inc. (1990) 224 Cal.App.3d 16, 29, 273 Cal.Rptr. 615.) The Commission has promulgated 13 orders governing specific industries (Cal.Code Regs., tit. 8, §§ 11010, 11020, 11030, 11040, 11050, 11060, 11070, 11080, 11090, 11100, 11110, 11120, 11130) and...