Beware of the ‘Employee Bonus’ Booby-Trap

By December 19, 2003Articles

The holidays are upon us. ‘Tis the season to be merry. Time to reward hard-working and loyal employees with a bonus. No one in their right mind would complain about getting a bonus from his or her employer, right? After all, the law does not require an employer to pay bonuses in addition to regular wages. And no grateful employee would ever sue their employer claiming his or her bonus was unlawful, right? Well guess again.

In Ralph’s Grocery Company v. Superior Court of Los Angeles, (October 23, 2003) that very thing happened. There, an employee filed a class action lawsuit alleging that Ralph’s practice of factoring worker’s compensation costs, cash and merchandise shortages into the bonus calculation was unlawful under California’s wage and hour laws and unfair business practices statute.

The appellate court held, that since the incentive bonus constituted “wages” under California law, Ralph’s when calculating a non-exempt employee’s bonus, could not deduct certain expenses such as the cost of workers’ compensation, cash shortages, breakage or loss of equipment. The court based their decision primarily on the language of the California wage order covering non-exempt grocery workers and Labor Code Section 3751.

Wage Order No. 7 provides in pertinent part that: “No employer shall make any deduction from the wage or require any reimbursement from an employee for any cash shortage, breakage or loss of equipment unless it can be shown that the shortage, breakage or loss is caused by a dishonest or willful act, or by the gross negligence of the employee.”

Section 3751 likewise prohibits employers from taking any deduction from the earnings
of any employee, either directly or indirectly, to cover the whole or any part of the cost of workers’ compensation. Section 3751 applies to both exempt (managers, administrators and executives) and non-exempt employees.

In this day of class action lawsuits, every employer with an incentive pay, commission or bonus program would be well-advised to examine their policies to ensure compliance with California law.

For any questions or comments regarding this Labor Law Update please contact attorney Michael Daly of the Daly Law Firm at (619) 525-7000 or

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