Client Alert

New Guidance from the California Supreme Court on Incentive Compensation Plans and Authorized Deductions

October 05, 2007

George W. Abele, Holly R. Lake, and M. Kirby C. Wilcox

In Prachasaisoradej v. Ralphs Grocery Company, Inc. (Ralphs), the California Supreme Court examined the validity of Ralphs Incentive Compensation Plan. According to the Plan, eligible employees were entitled to additional compensation, above and beyond their promised base wage, according to a formula that defined store profits as revenue less certain business costs, including workers compensation insurance, store shortages and other business expenses. In conducting its analysis and reviewing prior case law, the Supreme Court answered a question with which employers often struggle: What calculations and adjustments are permitted in determining commissions and bonus payments?

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