Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-cand-3_06-cv-03161/USCOURTS-cand-3_06-cv-03161-7/pdf.json

Nature of Suit Code: 190
Nature of Suit: Other Contract Actions
Cause of Action: 28:1332 Diversity-Contract Dispute

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United States District Court

For the Northern District of California

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1The Court first issued this Memorandum of Decision, Findings

of Fact and Conclusions of Law on July 31, 2007. See Docket No.

34. Plaintiff moved the Court to amend certain aspects of this

order pursuant to Federal Rule of Civil Procedure 59(e). See

Docket No. 43. The Court granted that motion in part and issues

this Amended Memorandum of Decision; Findings of Fact and

Conclusions of Law pursuant to that order. See Docket No. 46. The

substantive amendments appear in sections III.B, III.E, III.F, and

IV of this memorandum.

UNITED STATES DISTRICT COURT

NORTHERN DISTRICT OF CALIFORNIA

RICHARD A. KEMPF,

Plaintiff,

v.

BARRETT BUSINESS SERVICES, INC., 

Defendant. 

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No. C-06-3161 SC

AMENDED MEMORANDUM OF

DECISION; FINDINGS OF

FACT AND CONCLUSIONS

OF LAW

I. INTRODUCTION

Plaintiff Richard Kempf ("Plaintiff" or "Kempf") brought this

suit against Barrett Business Services, Inc. ("Defendant" or

"Barrett"), alleging causes of action for unpaid wages, breach of 

contract, and wrongful termination. See Compl., Docket No. 1. 

Before trial, Kempf abandoned his wrongful termination claim. The

Court held a trial on the remaining issues on June 18 and 19,

2007.1 

Generally, the dispute centers around Barrett's Branch

Manager Profit Sharing Bonus Program. Kempf alleges that

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throughout his employment with Barrett, Defendant improperly

deducted certain penalties from his quarterly bonus payments, in

violation of his employment agreement. Barrett maintains that the

deductions were always part of the bonus calculation, were

explained to Kempf when he began working for Barrett, and are

contemplated by the terms of the employment agreement.

Having fully considered the evidence and testimony offered at

trial and the arguments of counsel, the Court by this memorandum

of decision issues its findings of fact and conclusions of law

pursuant to Rule 52(a) of the Federal Rules of Civil Procedure. 

For the reasons set forth below, the Court concludes that Kempf is

not entitled to recover damages resulting from the 30/20

adjustment to his bonus, but is entitled to damages resulting from

the retroactive workers' compensation adjustment applied in the

third quarter of 2005.

II. FINDINGS OF FACT

A. The Parties

1. Kempf is a natural person residing in the City of Loomis,

in Placer County, California.

2. Barrett is a corporation organized under the laws of the

State of Maryland, with its headquarters and principal place of

business in Vancouver, Washington.

3. Barrett is a human resources management provider. The

services Barrett offers fall into three primary categories:

temporary staffing, recruitment and placement of employees, and

professional employer organization services (in which Barrett acts

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as a co-employer with its client and runs all of the client's

traditional human resources functions).

4. Barrett has 39 branch offices located in 30 states.

5. Each Barrett branch office is managed by a branch

manager, who is responsible for the branch's profit & loss,

growth, and regular business operations.

B. Kempf Begins Employment With Barrett

6. In March of 2002, a recruiter employed by Barrett

contacted Kempf regarding an opening as the Branch Manager for

Barrett's Napa and Fairfield offices. During this discussion, Mr.

Kempf informed the recruiter of his salary expectations.

7. After the initial discussion with the recruiter, Kempf

then spoke by telephone with Michael Elich ("Elich"), then

Barrett's Director of Business Development, who was responsible

for hiring branch managers. Elich and Kempf spoke for nearly an

hour, but did not discuss compensation at that time.

8. Kempf and Elich subsequently met in person for an

interview. During the interview, they discussed the

responsibilities of the Napa/Fairfield branch manager. Kempf

informed Elich that he expected his total compensation to exceed

$100,000 per year, through a combination of salary and performance

bonus. Elich said that Barrett would meet this expectation as

long as Kempf satisfied the company's growth and performance

targets for the Napa and Fairfield offices. Kempf and Elich did

not discuss the breakdown of Kempf's compensation, other than that

it would include a base salary and some form of profit sharing

bonus. Elich did not provide an explicit definition of "profit"

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during this meeting. No one else was present during this

interview, and the parties did not exchange any written documents

at that time.

9. On April 1, 2002, Kempf received a letter offering him

the position of Branch Manager - Fairfield, with a base salary of

$75,000 per year, and profit sharing to be paid quarterly based on

the branch's yearly profit. See Ex. D-503 (the "Letter"). 

10. Kempf returned a signed copy of the Letter to Barrett and

sent a copy to the recruiter.

C. Branch Manager Orientation

11. On the morning of April 2, 2002, Kempf attended a

training session for new branch managers at Barrett's Roseville

office. Greg Vaughn, currently a Vice President of Barrett, led

the training session. In addition to Kempf and Vaughn, two other

new branch managers were present.

12. During the training session, the new branch managers

were given copies of the Barrett Business Services, Inc.

Employment Agreement (the "Agreement") with the instruction to

review it sign it by the end of lunch that day. Kempf reviewed

and signed the Agreement. See Ex. D-501.

13. In the training session, Vaughn explained Barrett's

financial reporting process at length, including the Barrett

Branch Manager Profit Sharing Program. Mr. Vaughn provided the

new branch managers with samples of Barrett's quarterly financial

reports and explained the process the company used to determine

the branch managers' quarterly profit sharing bonuses.

///

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D. The Barrett Branch Manager Profit Sharing Program

14. In addition to base salary, Barrett branch managers were

eligible for quarterly bonuses through their participation in the

Barrett Branch Manager Profit Sharing Program ("PSP"). The PSP is

intended to allow branch managers to earn higher compensation

based on the success of their branches.

15. Plaintiff participated in the PSP.

16. There is no document which explains the rules and

formulae governing the determination of the quarterly bonuses in

the PSP.

17. The branch managers received as a quarterly bonus a

percentage of the Branch Manager Bonus Basis ("Basis"). The

percentage of the Basis that was included in the bonus increased

as the Basis increased. 

18. The Basis was determined by applying certain adjustments

to the branch's net income before taxes. 

19. The adjustments to the net income before taxes include

an adjustment for accounts receivable, for satisfying the "30/20

ratio" target, and for workers' compensation expenses. 

20. The 30/20 ratio refers to a goal that each branch spend

no more than 30% of its gross margin on salaries and no more than

20% of its gross margin on other overhead expenses. When a branch

exceeds either of those targets, the excess is deducted from the

Basis.

21. At the end of each quarter, the branch managers received

from Barrett a draft Quarterly Bonus Schedule, which showed the

branch's net income before taxes, the various adjustments, and the

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Basis, as well as the bonuses for branch managers and other branch

employees. The branch managers had the opportunity to review the

draft and comment before Barrett paid the bonuses. See e.g., Ex.

D-583 (Nov. 3, 2003, email from Jim Miller to Kempf enclosing the 

Quarterly Bonus Schedule).

22. After addressing any concerns raised by the branch

managers in response to the draft Quarterly Bonus Schedule,

Barrett issued final Quarterly Bonus Schedules. Barrett paid the

quarterly bonuses approximately 30 days after the end of the

quarter. See e.g., Ex. D-510 (June 30, 2002 Quarterly Bonus

Schedule).

23. Mr. Kempf received the draft Quarterly Bonus Schedule

and reviewed it for each of the 14 quarters he worked for Barrett. 

Each of these Quarterly Bonus Schedules included a 30/20

adjustment. See Exs. D-510, D-515, D-519, D-521, D-525, D-528, D531, D-535, D-539, D-542, D-546, D-555, D-571, D-577.

24. Although Kempf periodically asked questions about the

bonus calculations for his branch, he did not challenge the

propriety of the 30/20 adjustment or complain that it was not

supposed to be part of the calculations under the PSP. See e.g.,

Exs. D-582 (Dec. 27, 2002 email from Jim Miller to Kempf regarding

"November Preliminary Branch Statements"), D-584 (Nov. 8, 2003

email from Miller to Kempf regarding "3rd Quarter Branch Profit

Sharing Draft Calculations"), D-586 (April 1, 2004 email from

Miller to Kempf regarding "Preliminary February Financials").

25. In addition to the 30/20 ratio adjustment, beginning

with the third quarter of 2005, Barrett also adjusted the

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quarterly Basis based on the branch's workers' compensation

expenses. See Ex. D-603 (Nov. 1, 2005 email from Vaughn to branch

managers regarding "Revisions to Workers' Compensation and Branch

Profitability Calculations"). 

26. Barrett pays its own workers' compensation insurance

costs (i.e., it self-insures). The Basis adjustment was intended

to bring Barrett's workers' compensation expenditures in line with

the industry standard "Alternative Lost Cost" or "Pure Premium"

rates, and to align the branches' profits and expenditures with

those of the company as a whole.

27. Barrett announced the workers' compensation adjustment

on November 1, 2005. See Ex. D-603. The draft Quarterly Bonus

Schedule for the third quarter of 2005, which ended on September

30, included an adjustment for "YTD WC expense to 80% ALC for

branch manager." See Ex. D-577.

28. According to Vaughn, there was no internal discussion at

Barrett regarding whether it would be better to apply the workers'

compensation adjustment prospectively only, or to apply it

retroactively.

E. Kempf's Termination

29. Barrett terminated Kempf's employment on November 8,

2005.

30. During the three and a half years Kempf worked for

Barrett, the 30/20 ratio adjustment reduced his total bonus by

$7,495.00. The workers' compensation adjustment reduced Kempf's

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2

During trial, after Mr. Vaughn testified regarding

Plaintiff's damages calculations, the parties agreed to these

figures.

3

As discussed below, Barrett does allege that Kempf is not

entitled to recover because he has unclean hands. This is

different from alleging that Kempf did not perform (i.e., that

Kempf breached the Agreement).

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bonus for the third quarter of 2005 by $29,961.00.2 

III. CONCLUSIONS OF LAW

A. Breach of Contract

"A cause of action for breach of contract is comprised of the

following elements: (1) the contract, (2) plaintiff's performance

or excuse for nonperformance, (3) defendant's breach, and (4) the

resulting damages to plaintiff." Careau & Co. v. Sec. Pac. Bus.

Credit, Inc., 272 Cal. Rptr. 387, 395 (Ct. App. 1990). 

The second and fourth elements are not at issue here. 

Barrett does not dispute that Kempf performed his obligations

under the Agreement,3 and the parties agree that Barrett's

adjustments to the Basis during Kempf's employment cost Kempf

$37,456.00. That leaves for the Court the questions of what the

Agreement actually provided, and whether or not Barrett's

adjustments constituted a breach. 

1. Contract Interpretation

The Agreement provides that Kempf will participate in the

PSP, but does not include the specific terms of the PSP. See Ex.

D-501. Kempf argues that the Letter is part of the Agreement, so

the Court may consider the compensation information in the Letter. 

If the Letter is not part of the Agreement, Kempf argues that the

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Agreement is ambiguous, so the Court may consider the Letter as

parol evidence to resolve the ambiguity.

Barrett maintains that the Letter is not part of the

Agreement, so the Court should not consider it. Further, Barrett

argues that the Agreement is unambiguous, so the Court should not

consider the Letter as parol evidence. Finally, Barrett asserts

that even if the Court finds the Agreement to be ambiguous, the

only parol evidence the Court should consider is the conduct of

the parties following the contract.

The only authority Kempf offers for treating the Letter as

part of the Agreement is Mayers v. Loew's, Inc., 221 P.2d 26 (Cal.

1950). Mayers is distinguishable, however. In that case, the

defendant wanted the court to consider a letter and bulletin

containing information about the effective dates of an agreement,

in addition to the explicit terms of the agreement itself. See

id. at 29. The letter and contract in Mayers were delivered at

the same time, and with the express intent of incorporating dates

from the letter into the formal written contract. See id. Here,

Kempf received the Letter prior to receiving the Agreement, and it

is clear that the Letter is not part of the Agreement. See Exs.

D-501, D-503. The Letter states that it is a "conditional offer

of employment" and that it provides an "outline" of the "overall

description of [the] offer". Ex. D-501. Unlike the letter in

Mayer, nothing in the Letter here suggests that it was intended to

incorporate or otherwise modify the terms of the Agreement. See

Mayers, 221 P.2d at 29. The Agreement is intended to represent

the "entire understanding between the parties." Ex. D-501 § 15. 

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Absent evidence that the parties intended the Letter to be part of

the Agreement, the Court will not treat the Letter as such.

This does not mean that the Court will not consider the

Letter at all. Because the Agreement is integrated, parol

evidence is only admissible if the Agreement is in some way

ambiguous. See e.g., Consol. World. Invs., Inc. v. Lido

Preferred, Ltd., 11 Cal. Rptr. 2d 524, 526-27 (1992) ("One

exception to the parol evidence rule is that extrinsic evidence

may be introduced to explain the meaning of ambiguous contractual

language."). "The test of admissibility of extrinsic evidence to

explain the meaning of a written instrument is not whether it

appears to the court to be plain and unambiguous on its face, but

whether the offered evidence is relevant to prove a meaning to

which the language of the instrument is reasonably susceptible." 

Pac. Gas & Elec. Co. v. G.W. Thomas Drayage & Rigging Co., 442.

P.2d 641, 644 (Cal. 1968). 

The critical phrase in the Agreement is "participation in the

Barrett Branch Manager profit sharing program." See Ex. D-501 §

3. The Agreement does not define "participation" or "profit

sharing program" and it does not incorporate or otherwise refer to

any other document. Kempf asserts that the term "profit" refers

to gross income less costs, otherwise known as net income, and

that participation in the profit sharing program entitled him to a

percentage of his branch's net income without adjustments for the

30/20 ratio or workers' compensation. On the other hand, Barrett

argues that the term "profit sharing" means a "system or process

under which employees receive a part of an industrial or

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commercial enterprise," which, by implication, would allow for

distribution of a percentage of an adjusted net income (i.e., the

Basis). Without looking beyond the Agreement, and in particular,

section 3 of the Agreement, both interpretations are plausible. 

As such, the Court will consider parol evidence. See e.g., Garcia

v. Truck Ins. Exch., 682 P.2d 1100, 1104-05 (Cal. 1986)

(considering parol evidence to determine whether written

instrument was ambiguous; citing Pac. Gas & Elec. Co.). 

After considering the parol evidence offered by both parties,

the Court concludes that the phrase "participation in the Barrett

Branch Manager profit sharing program" in the Agreement was not

intended to require Barrett to distribute a set percentage of its

unadjusted net income to branch managers. The only evidence Kempf

offered at trial in support of his interpretation was the Letter. 

Unfortunately for Kempf, the Letter does nothing to resolve the

ambiguity described above. The Letter describes the terms of the

conditional offer of employment Barrett made to Kempf, including

"Profit Sharing to be paid quarterly in accordance with the

following schedule based on Branch's yearly profit," followed by a

table of bonus percentages. See Ex. D-503. Nothing in the Letter

suggests that the "profit" used in determining bonuses for the PSP

was limited to net income. Further, the term "based on" implies

that Barrett may adust profits before determining bonuses. 

The parol evidence Barrett offered compels the same

conclusion. "The conduct of the parties after execution of the

contract and before any controversy has arisen as to its effect

affords the most reliable evidence of the parties' intentions." 

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4Kempf does not argue that Barrett's quarterly adjustment to

the Basis for accounts receivable is improper, but he provides no

explanation how the accounts receivable adjustment is legally

distinct from the 30/20 adjustment. Both reflect adjustments

Barrett made to the net income in order to determine the Basis.

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Kennecott Corp. v. Union Oil Co., 242 Cal. Rptr. 403, 410 (Ct.

App. 1987)(citations omitted). The parties' conduct after Kempf

signed the Agreement, and for the duration of his employment,

demonstrates that Barrett's interpretation is the correct one. 

Barrett explained the 30/20 deduction during Kempf's orientation. 

For every quarter thereafter, Barrett sent Kempf a draft of the

Quarterly Bonus Schedule reflecting an adjustment to the Basis to

account for the 30/20 ratio. Kempf reviewed the Quarterly Bonus

Schedules without ever challenging the 30/20 adjustment. Prior to

this litigation, both parties behaved as though adjusting the net

income to determine the Basis was an accepted practice under the

Agreement.4 Based on this conduct, and in the absence of

compelling evidence to the contrary, the Court concludes that the

Agreement permitted Barrett to use an adjusted net income in

determining the Basis and paying bonuses to branch managers.

2. Breach of Contract

In light of the foregoing interpretation of the phrase

"participation in the Barrett Branch Manager profit sharing

program," the Court now turns to the alleged breaches.

a. The 30/20 Adjustment

Barrett's use of the 30/20 adjustment in calculating the

Basis and Kempf's bonus did not violate the Agreement. Kempf's

sole argument for breach was that the Agreement required Barrett

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to pay Kempf a quarterly bonus consisting of a percentage of his

branch's unadjusted quarterly net income, with the percentage

based on the branch's annual net income. In his trial brief,

Kempf asserted that "Defendant expressly and unambiguously agreed

to compensate Plaintiff profit sharing wages which were to be

based on a percentage of the profits generated by Plaintiff's

Branches. . . ." Pl.'s Tr. Brief, Docket No. 16, at 9 (emphasis

added). It is clear that the Basis which Barrett used to

determine Kempf's quarterly bonuses was "based on" his branch's

net income. During trial, Mr. Vaughn testified at length about

how Barrett calculated Kempf's bonus every quarter, using the

financial statements from the first quarter of 2005 to illustrate

the process. Every quarter, Kempf received a bonus which was

derived in large part from his branch's net income. Barrett's use

of the 30/20 adjustment was therefore not a violation of the

Agreement.

b. The Workers' Compensation Adjustment

The retroactive adjustment to the Basis for workers'

compensation insurance in the third quarter of 2005 is more

complicated. As discussed above, the Agreement permitted Barrett

to make adjustments to the net income in determining the Basis. 

Further, as Barrett argues, the Agreement permitted Barrett to

unilaterally modify Kempf's compensation. See Ex. D-501 § 3

("Further, the compensation to Employee may be modified without

affecting the remaining terms, conditions, and covenants in this

Agreement."). That Barrett could change the terms of the PSP

going forward is unremarkable, however. It is the retroactive

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aspect of the workers' compensation adjustment that is

problematic.

Neither party provides legal authority on the issue of

retroactive modification. Barrett cites dicta from three

inapposite cases in support of its position that employers may

modify compensation. See Ladas v. Ca. State Auto. Ass'n., 23 Cal.

Rptr. 2d 810, 816 (Ct. App. 1993)(implied contractual provision

requiring defendants to pay commissions comparable to "industry

standards" was not enforceable); Gonzales v. MetPath, Inc., 262

Cal. Rptr. 654, 658 (Ct. App. 1989)(affirming lower court's

finding that plaintiff failed to establish prima facie case for

employment discrimination); Rochlis v. Walt Disney Co., 23 Cal.

Rptr. 2d. 793, 799 (Ct. App. 1993) (contract terms Defendant

allegedly breached were not enforceable). 

Barrett also argues that the modification of Kempf's

compensation to reflect the workers' compensation adjustment was a

new unilateral offer, which Kempf accepted by continuing to work. 

Neither Barrett's legal authority nor the Agreement supports this

position. The cases Barrett cites do not address retroactive

changes to the parties' agreements. In Craig v. Brown & Root,

Inc., 100 Cal. Rptr. 2d 818, 820-21 (Ct. App. 2000), the court

held that the employee was bound by the terms of an arbitration

agreement once the company sent notice of it to the employee and

the employee continued to work for company. In Newburger v.

Rifkind, 104 Cal. Rptr. 663, 667 (Ct. App. 1972), the question was

not whether the employees had agreed to the new terms proposed by

the employer, but whether the employees' continued employment was

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sufficient consideration for the benefits they received under the

new agreement. The Newburger court specifically noted the policy

favoring the treatment of modifications as offers of new

unilateral contracts where the employees were receiving more or

better benefits: 

In our own jurisdiction the attitude is to consider the

additional advantages to employees as being in effect

offers for a unilateral contract which offer is accepted

if the employee continues in the employment, and not as

being mere offers of gifts. They make the employees more

content and happier in their jobs, cause the employees

to forego their rights to seek other employment, assist

in avoiding labor turnover, and are considered of

advantage to both the employer and the employees. 

Id. (internal quotations and citations omitted). Such policy is

not applicable where, as here, the modification was not to the

employee's advantage. 

Barrett's two remaining authorities actually address the

issue of retroactive modification. In Albrant v. Sterling

Furniture Co., 736 P.2d 201, 203 n.2 (Or. Ct. App. 1985), the

court noted that the plaintiff was not complaining that she had

not been fully compensated for prior work, only challenging the

modification going forward. The court concluded that "an employer

may also modify the employment contract so long as the

modification applies only prospectively." Id. at 203 (emphasis

added). In Stieber v. Journal Publ'g Co., 901 P.2d 201, 204 (N.M.

Ct. App. 1995), the court surveyed different jurisdictions and

concluded that in the majority of the jurisdictions, the

employer's right to terminate at-will employees such as Kempf

includes a right to prospectively modify the terms of employment. 

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See also DiGiacinto v. Ameriko-Omserv Corp., 59 Cal. App. 4th 629,

636 (Ct. App. 1997) (collecting authority). The weight of the

authority suggests that because Kempf was an at-will employee,

Barrett had the right to modify the Agreement going forward. None

of these cases suggest that Barrett could retroactively adjust

Kempf's compensation when he had already performed his obligations

for the third quarter of 2005.

The text of the Agreement does not help Barrett either. 

Pursuant to section 15 of the Agreement, "No modification or

addition hereto shall be valid except by a writing signed by the

parties hereto." Ex. D-501 § 15. By characterizing the workers'

compensation adjustment in November 2005 as a modification to the

Agreement, Barrett invokes section 15. Kempf did not agree in

writing to the new adjustment to the Basis calculation. Even had

he agreed to the modification implicitly by continuing to work for

Barrett (which is not clearly the case, since he was terminated

within days of Barrett announcing the change in Basis

calculation), such implied acceptance would only have applied from

that point forward.

By September 30, 2005, Kempf had completed performance of his

contractual obligations to Barrett for the third quarter, and was

entitled to the agreed-upon compensation. Barrett's decision in

November of 2005 to pay Kempf less than the PSP authorized at the

time Kempf completed performance was a violation of the Agreement. 

The parties agreed at trial that the workers' compensation

adjustment reduced Kempf's third quarter 2005 bonus by $29,961.00. 

Kempf is therefore entitled to recover this amount on his breach

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of contract claim.

B. Nonpayment of Wages in Violation Of Section 201

The Court must now consider whether, based on the established

facts, the retroactive adjustment to the bonus calculation also

amounted to a violation of California Labor Code section 201(a). 

Neither party has provided the Court with any guidance on this

issue beyond what was contained in the pre-trial briefing and what

was argued during trial.

The California Labor Code's protections against unpaid wages

are applicable not only to employees paid by the hour, but also to

salaried executives such as Kempf. See On-Line Power, Inc. v.

Mazur, 57 Cal. Rptr. 3d 698, 702 (Ct. App. 2007). It is

immaterial that a salaried employee may also have a claim for

breach of contract. See id. at 703. According to the Labor Code,

"wages" are defined to include "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." Cal. Labor Code § 200(a). 

This includes incentive-based bonuses such as the PSP. See

Neisendorf v. Levi Strauss & Co., 49 Cal. Rptr. 3d 216, 225 (Ct.

App. 2006) (stating that "bonuses are 'wages' within the meaning

of Labor Code section 200") (citing Lucian v. All States Trucking

Co., 171 Cal. Rptr. 262, 263 (Ct. App. 1981)).

Pursuant to California Labor Code section 201(a), "[i]f an

employer discharges an employee, the wages earned and unpaid at

the time of discharge are due and payable immediately." Cal.

Labor Code § 201(a). When Barrett terminated Kempf on November 8,

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2005, it owed him the full and unadjusted amount of the third

quarter bonus. Barrett did not dispute that Kempf was due some

bonus for the quarter, as it sent him a quarterly bonus schedule

and paid him the adjusted bonus. The only dispute is over the

amount. The Court has already determined that the retroactive

adjustment reduced Kempf's bonus by $29,961.00. The Court now

concludes that, as a matter of law, Barrett's failure to pay Kempf

the unadjusted bonus at the time of his termination was a

violation of California Labor Code section 201(a). 

C. Willful Withholding of Wages in Violation of Section 203

Kempf alleges that Barrett willfully refused to pay him wages

due at the time of his termination. Pursuant to California Labor

Code section 203, where an employer willfully fails to pay wages

of an employee who is discharged or who quits, "the wages of the

employee shall continue as a penalty from the due date thereof at

the same rate until paid or until an action therefor is commenced;

but the wages shall not continue for more than 30 days." Cal.

Labor Code § 203.

The only question here is whether Barrett's failure to pay

Kempf what it withheld pursuant to the workers' compensation

adjustment meets the legal standard for willfulness. In

California, the failure to pay wages is willful "when an employer

intentionally fails to pay wages to an employee when those wages

are due. However, a good faith dispute that any wages are due

will preclude the imposition of waiting time penalties under

Section 203." Cal. Code. Regs. tit. 8 § 13520. The regulation

goes on to define a "good faith dispute" as one that occurs "when

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an employer presents a defense, based in law or fact which, if

successful, would preclude any recovery on the part of the

employee. The fact that a defense is ultimately unsuccessful will

not preclude a finding that a good faith dispute did not exist." 

Id. § 13850(a). 

Barrett put forth legitimate defenses to Kempf's breach of

contract claim. Although Kempf prevailed on a portion of that

claim, the Court is satisfied that there was a good faith dispute

as to whether Barrett owed Kempf any unpaid wages. As such, the

Court declines to impose the statutory waiting period penalties.

D. Unclean Hands

Barrett asserts as a defense that Kempf has unclean hands,

and is therefore not entitled to relief. "In California, the

doctrine of unclean hands may apply to legal as well as equitable

claims and to both tort and contract remedies." Camp v. Jeffer,

Mangels, Butler, & Marmaro, 41 Cal. Rptr. 2d 329, 340 (Ct. App.

1995). The defense applies only where the plaintiff's alleged

wrongful act related directly to the subject of the law suit and

affects the balance of the equities between the parties. Id.

(citing Fibreboard Paper Prods. Co. v. East Bay Union of

Machinists, Local 1304, 39 Cal. Rptr. 64, 97 (Ct. App. 1964)).

In its brief, Barrett argued that Kempf's management of

branch financials violated corporate policy. Def.'s Tr. Brief,

Docket No. 22, at 19. Despite these purported violations, Elich

testified at trial that there was nothing specific wrong with

Kempf's work, and that he fired Kempf due to a general decline in

confidence. Barrett argues that Kempf's poor management of the

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branch's expenses caused the adjustments at dispute in this case,

so he is responsible for his own damages. At trial, Vaughn

testified that there was nothing Kempf could have done to change

the workers' compensation adjustment or its effect on Kempf's

bonus. If Kempf could not have affected the outcome, his behavior

has no effect on the equities between the parties.

Barrett failed to prove its unclean hands defense. All of

the testimony presented at trial either conflicted with or

seriously undermined this argument. 

E. Entitlement to Attorney's Fees and Litigation Costs

Section 218.5 of the California Labor Code provides that

"[i]n any action brought for the nonpayment of wages . . . the

court shall award reasonable attorney's fees and costs to the

prevailing party if any party to the action requests attorney's

fees and costs upon the initiation of the action." Cal. Labor

Code § 218.5. Kempf requested an award of fees and costs in the

Complaint. See Compl. ¶ 29. Because the Court has now found that

Barrett violated section 201(a), Kempf is entitled to recover

reasonable attorney's fees and costs. 

F. Prejudgment Interest

Section 218.6 of the California Labor Code provides that a

prevailing plaintiff in an action for nonpayment of wages may

recover interest from the date the wages were due. See Cal. Labor

Code § 218.6. The appropriate interest rate is 10% per year, as

determined in California Civil Code section 3289. See id.; Cal.

Civ. Code § 3289(b). Having prevailed on his section 201 claim,

Kempf is entitled to prejudgment interest on the unpaid wages. 

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Pursuant to section 201(a), the unpaid wages were due on November

8, 2005, the date on which Barrett terminated Kempf's employment. 

Interest therefore began to accrue on November 8, 2005, and

stopped accruing on July 31, 2007, the date on which the Court

originally entered judgment in this matter.

IV. CONCLUSION

For the foregoing reasons, the Court finds that Barrett's use

of the 30/20 ratio in determining the Basis was not a violation of

the Agreement, but that the retroactive workers' compensation

adjustment violated both the Agreement and the California Labor

Code. The Court therefore AWARDS Kempf $29,961.00 in damages,

plus $5179.56 in prejudgment interest. The Court further AWARDS

Kempf his reasonable attorney's fees and litigation costs.

IT IS SO ORDERED.

Dated: November 20, 2007

 UNITED STATES DISTRICT JUDGE

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