Court Opinion

ID: 9782217
Source: CourtListenerOpinion
Date Created: 2023-08-30 18:08:29.173834+00
Date Added: 2024-06-11T12:15:17.051846
License: Public Domain

WERDEGAR, J., Dissenting.
This is a case of statutory interpretation. Labor Code section 37511 prohibits employers from directly or indirectly passing all or any part of their workers’ compensation costs back to, their employees through deductions from their employees’ compensation. Ralphs Grocery Company, Inc.’s compensation plan does just that. Whatever this court’s views concerning the reasonableness and desirability of such plans, judicial notions of policy are irrelevant if the Legislature’s policy decision, as embodied in the text of the statute, compels a different result. It does so here. Accordingly, I respectfully dissent.
I
As this case is before us on demurrer, we must accept as true all well-pleaded allegations in plaintiff Eddy Korkiat Prachasaisoradej ’ s second amended complaint (complaint).
Prachasaisoradej is a Ralphs Grocery Company, Inc. (Ralphs), employee. He sued Ralphs under the unfair competition law for adopting an employee compensation plan that, according to the complaint, made compensation partially contingent on, inter alia, (1) Ralphs’s workers’ compensation costs, and (2) cash and merchandise shortages. Prachasaisoradej contended the compensation plan violates section 3751 (barring employer pass-throughs of workers’ compensation costs), as well as various other Labor Code provisions and a Labor Commissioner wage order governing employer pass-throughs of cash and merchandise shortages.
The particulars of the plan are not in dispute. Ralphs computes its employee compensation based in part on a fixed wage and in part on a bonus tied to store performance compared with projections. Each store has a financial target, and the employee bonuses for each store are based on how that store does compared to its target. Under Ralphs’s formula for measuring *246store performance, when an employee files a workers’ compensation claim, the expenses for that claim are charged against the store where the claimant works. Consequently, an employee’s filing of a workers’ compensation claim reduces the store’s performance figure and the resulting bonuses employees at that store receive. The same is true of cash shortages and merchandise losses, which are likewise charged against a store’s performance figure and reduce its employees’ compensation. The only question is whether this arrangement is lawful.
II
For purposes of Prachasaisoradej’s workers’ compensation deduction claim, one statute is central. Section 3751, subdivision (a) provides in part: “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 [workers’] compensation . . . .” (Italics added.)
Ralphs does not contest that its bonus plan constitutes “earnings” within the meaning of section 3751. Thus, the only question under section 3751 is whether Ralphs’s plan involves a “direct[] or indirect!]” deduction from its employees’ earnings “to cover the whole or any part of the cost of [workers’] compensation.” (Italics added.) As section 3751 regulates employee wages and working conditions, it must be broadly construed in favor of ensuring the workers’ protections it was intended to guarantee: “[I]n light of the remedial nature of the legislative enactments authorizing the regulation of wages, hours and working conditions for the protection and benefit of employees, the statutory provisions are to be liberally construed with an eye to promoting such protection. . . . ‘They are not construed within narrow limits of the letter of the law, but rather are to be given liberal effect to promote the general object sought to be accomplished .. ..’ ”2 (Industrial Welfare Com. v. Superior Court (1980) 27 Cal.3d 690, 702 [166 Cal.Rptr. 331, 613 P.2d 579]; see also Murphy v. Kenneth Cole Productions, Inc. (2007) 40 Cal.4th 1094, 1103-1104 [56 Cal.Rptr.3d 880, 155 P.3d 284]; Henning v. Industrial Welfare Com. (1988) 46 Cal.3d 1262, 1269 [252 Cal.Rptr. 278, 762 P.2d 442]; Kerr’s Catering Service v. Department of Industrial Relations (1962) 57 Cal.2d 319, 330 [19 Cal.Rptr. 492, 369 P.2d 20] (Kerr’s Catering) [the “Legislature and our courts have accorded to wages special considerations” in order to protect the “welfare of the wage earner”]; § 3202 [workers’ compensation scheme, of which § 3751 is a part, should be interpreted liberally in favor of workers].)
*247Rudimentary math and economics demonstrate that Ralphs’s plan exacts, at the least, an indirect deduction from employee compensation for part of Ralphs’s workers’ compensation costs. Bonuses are calculated on the basis of Ralphs’s special formula for plan-defined “profit.” That formula includes workers’ compensation costs as a deduction. Thus, if workers’ compensation costs go up, the performance figure used in the calculation goes down, as does the bonus paid out. Consequently, each employee’s bonus figure is tied to the employer’s workers’ compensation costs at the employee’s store; as those costs rise, the employee suffers a corresponding reduction in compensation.
Granted, the deduction is not dollar for dollar, but the linkage of employee compensation to the employer’s workers’ compensation costs is direct and inescapable. Moreover, section 375l’s prohibition is not limited only to dollar-for-dollar deductions. It applies even to “indirect[]” deductions to cover “any part” of the cost of workers’ compensation, (ibid.) Through its bonus plan, Ralphs allays a portion of its workers’ compensation costs. If those costs rise $1, its bonus plan reduces employee compensation by some corresponding amount. Whether it thereby saves 5 cents or 50 cents on the dollar is immaterial, as the statute makes no distinction; either is illegal. Ralphs does not have to structure as a bonus plan any part of the compensation package it offers employees, but if it does, it may not make compensation contingent on workers’ compensation costs.
Ralphs’s plan directly implicates the rationale behind the statute. The premise of the workers’ compensation scheme, of which section 3751 is a part, is that in exchange for relinquishing tort-based remedies for industrial injury, workers receive the assurance of no-fault compensation from their employers; conversely, employers, in exchange for a shield from tort liability, must bear the cost of injuries suffered by workers in their employ. (Shoemaker v. Myers (1990) 52 Cal.3d 1, 16 [276 Cal.Rptr. 303, 801 P.2d 1054].) By including workers’ compensation costs in its formula to measure store performance, Ralphs ensures that any rise in workers’ compensation costs will be partially allayed by reduced payroll costs, as a portion of the industrial accident burden is shifted to Ralphs’s employees. The Legislature made a decision nearly 100 years ago to require employers alone to bear the financial costs of industrial safety. We should enforce that decision.
The complaint identifies a second way in which Ralphs’s plan undermines the Legislature’s workers’ compensation scheme. The structure of Ralphs’s plan, under which the costs of each workers’ compensation claim are charged to that store’s performance figure, creates a disincentive for injured employees to file even valid claims, as well as an incentive for fellow employees to pressure injured workers not to file claims. We may reasonably construe section 3751 as intended to protect against just such consequences. While the *248majority argues instead that “inclusion of workers’ compensation costs in the profit calculation [might] promote]] the goals of the workers’ compensation system by encouraging employees to maintain a safe workplace, and by discouraging claim abuse” (maj. opn., ante, at p. 242),3 this is beside the point; as the majority acknowledges, “this policy debate is not for the courts to resolve” (ibid.)—because the Legislature has already done so.
The lone case to analyze section 3751 in this context, Ralphs Grocery Co. v. Superior Court (2003) 112 Cal.App.4th 1090 [5 Cal.Rptr.3d 687] (Ralphs Grocery), arrived at the same conclusion: Ralphs’s plan runs afoul of “the plain language and clear meaning” of section 3751. (Ralphs Grocery, at p. 1102.) “Ralphs’s bonus plainly constitutes employee ‘earnings’ within the meaning of the statute; and the alleged deduction for workers’ compensation costs in the bonus calculation is, at the very least, an indirect means of holding employees responsible for such costs.” (Ibid., fn. omitted.)
Section 3751 prohibits the passthrough of workers’ compensation costs in the broadest possible terms. We are obligated to liberally construe that statute. Where, as here, a compensation plan both falls afoul of the literal terms of the statute and directly undermines the legislative goals underlying its adoption, it violates the statute. Accordingly, Prachasaisoradej has stated a claim.4
Ill
In reaching its contrary result, the majority appeals to “reason and common sense” (maj. opn., ante, at p. 237): Why cannot an employer base an employee bonus plan on its net profits? The answer is because in the limited sense of “profits” involved in this case, the Legislature has determined it cannot. The majority avoids this conclusion by focusing on form over *249function; purporting to define the moment at which the formal label “wages” or “earnings” attaches, the majority then asks whether workers’ compensation and other costs are subtracted before or after that largely arbitrary point, rather than focusing, as the rule of liberality requires, on whether the actual economic effect of the plan is of a type the Legislature condemned.
Relying on a series of dictionary definitions, the majority asserts it is only the final figure that results from Ralphs’s bonus calculation that Ralphs “offered or promised as compensation for labor performed by eligible employees, and it thus represented their supplemental ‘wages’ or ‘earnings.’ ” (Maj. opn., ante, at p. 229.) Accordingly, only this end figure is immune from workers’ compensation or other deductions; any calculations that precede it simply are not subject to the restrictions of section 3751 or any similar provision.
California courts have seen this sort of legerdemain before and properly rejected it. In Quillian, supra, 96 Cal.App.3d 156, as here, the employer offered its employee a base wage and a bonus. The bonus was calculated based on gas sales, other sales, and cash or inventory shortages. The employer repeatedly emphasized in the parties’ agreement that only the final result of this calculation was a bonus due the employee, and thus no shortages were deducted from the employee’s bonus. It argued to the court that its bonus plan was a valid way of creating employee incentives to increase sales and decrease shortages.
The Quillian court saw through this scheme. It recognized that simply labeling the final result of the calculation as the bonus due the employee did not immunize the calculation itself from scrutiny; the calculation itself involved a direct subtraction of shortages from the payment to the employee; and notwithstanding semantics, “the result is the same. The [employee] carries the burden of losses from the [business].” (Quillian, supra, 96 Cal.App.3d at p. 163.) The employer was prohibited by law from using this means to create an incentive for its workers to reduce shortages.
So too here. Ralphs attached the label of bonus only to the end product of its calculation. The majority accepts that characterization. In so doing, it ignores that the result here is the same as in Quillian-, the calculation leading up to the moment when the “bonus” label attaches illegally places on the employees the burden of workers’ compensation costs. (See Hudgins v. Neiman Marcus Group, Inc. (1995) 34 Cal.App.4th 1109, 1124 [41 Cal.Rptr.2d 46] (Hudgins) [employer “cannot avoid a finding that its . . . *250policy is unlawful simply by asserting that the deduction is just a step in its calculation of commission income”].) Here, as in Quillian, this method of computing compensation contravenes the clear statutory rule the Legislature has adopted against such burden-shifting.5
That the compensation plan may not upset employee expectations concerning payment, as the majority argues, is not determinative; employee expectations are but one of the interests protected by the relevant statutes. Speculation that employee expectations are not disturbed will not insulate from invalidation a plan that otherwise violates section 3751. In a similar vein, the majority frames this case as one involving “supplementary compensation,” with the implication that these payments are made at the grace of the employer and hencecan be calculated any way the employer wishes so long as any deduction does not drive compensation below the minimum wage. (Maj. opn., ante, at pp. 223, 228 & fn. 5.) But that the compensation is by way of a bonus plan is irrelevant; an employer cannot, through the device of separating compensation into multiple parts, insulate its payments from the operative statutes governing unlawful deductions. (See Kerr’s Catering, supra, 57 Cal.2d at p. 322 [invalidating unlawful deductions taken from payments made on top of regular wages]; Ralphs Grocery, supra, 112 Cal.App.4th at p. 1104 [same]; Quillian, supra, 96 Cal.App.3d at pp. 158-159 [same].)
The majority seeks to distinguish the various cases that have long recognized broad limits on employers’ ability to take certain types of deductions from employee compensation and thereby pass the costs of doing business directly back to employees. (E.g., Kerr’s Catering, supra, 57 Cal.2d 319; Ralphs Grocery, supra, 112 Cal.App.4th 1090; Quillian, supra, 96 Cal.App.3d 156; Hudgins, supra, 34 Cal.App.4th 1109.) The majority offers essentially three reasons why the compensation system at issue here differs from those previously found unlawful. First, it involves no deduction from an amount already promised or offered; the amount promised or offered is only the bonus, if any, that results from Ralphs’s calculation. This distinction is no *251distinction, but rests on the arbitrary selection of the final calculation of the bonus as the point at which legal protection against deductions attaches. As noted above, in Quillian as here only the final bonus amount was promised or offered; the court nevertheless recognized that legal protections against unlawful deductions applied equally to the formula used in calculating the offered bonus.
Second, the majority notes that unlike previous cases this plan does not involve a dollar-for-dollar deduction, but only a partial deduction. This is a distinction, but one without a difference. Section 3751 by its terms expressly prohibits deductions “to cover the whole or any part” of workers’ compensation costs. What an employer may not do in whole, it may not do in part. (See Ralphs Grocery, supra, 112 Cal.App.4th at p. 1104.)
Third, the majority contends that unlike in past cases there is no genuine pass-through of costs; the employer absorbs all costs itself. Although superficially appealing, this assertion betrays a lack of understanding of the economic effects of the compensation plan’s structure. That Ralphs initially bears the costs of workers’ compensation is true. In this sense, this case is no different from Kerr’s Catering, supra, 57 Cal.2d 319, Quillian, supra, 96 Cal.App.3d 156, and Hudgins, supra, 34 Cal.App.4th 1109, in which the employer likewise initially bore various costs. But by including workers’ compensation as a deduction in the subsequent calculation of employee bonuses, Ralphs recaptures a portion of these costs. If they rise, its payroll falls. For each additional dollar it spends on workers’ compensation, the performance figure for the store where a workers’ compensation claim was made drops by $1, and the bonuses and payroll it must pay at that store likewise drop, thereby defraying these expenses through reduced employee compensation. As in Kerr’s Catering, Quillian, and Hudgins, Ralphs covers expenses the Legislature has determined it should bear by reducing its calculation of employee compensation. As in Kerr’s Catering, Quillian, and Hudgins, that practice is illegal.6
The majority salts its opinion with the language of “profits,” repeatedly referring to the compensation scheme as a profit-based plan. This offers two rhetorical advantages. First, it affords the plan a presumption of validity, as who could rightly object to a company sharing its profits with its workers? More to the point, who could complain if in the absence of profits no bonuses are paid? Second, it allows the majority to dismiss any asserted statutorily *252compelled modifications to Ralphs’s formula as involving the “artificial inflation]” of profits. (See maj. opn., ante, at pp. 241-242.) At its core, the majority’s position rests on the belief that a calculation of bonus compensation that includes a workers’ compensation deduction is more just and authentic, and any calculation that removes that factor is unjust and a distortion of reality.
In truth, no bonus compensation formula has any inherent claim of virtue or correctness. In calculating compensation, Ralphs may mix in earnings and costs however it chooses, adding in those items it desires its employees to increase (e.g., sales) and subtracting out or assessing charges for those items it desires its employees to decrease.7 What Ralphs cannot do in constructing its formula is include factors the Legislature has decided should play no role in the calculation of employment compensation. Workers’ compensation is such a factor. Nor would complying with the law require Ralphs to artificially inflate its profits. The figure Ralphs uses to calculate employee bonuses is not necessarily a true profit figure; rather, it is a “plan-defined profit.” But even if it were, in this context, nothing would be wrong with “artificial inflation,” per se. The figures Ralphs, or any employer, uses in computing incentive-based compensation are used for that purpose only, they need not inflate their earnings in public statements issued to investors or filed with the Securities and Exchange Commission.
As amicus curiae Asian Law Caucus, Inc., correctly notes, employers can still adopt incentive plans tied to a company’s sales and revenue. They simply cannot also tie the plan to workers’ compensation costs. If enforcement of section 3751 according to its terms results in a higher base “earnings” figure, thereby potentially increasing employee compensation, employers may adjust by offering or negotiating a lower percentage multiplier, e.g., 10 percent of a modified figure rather than 15 percent of the current figure. This modification is not “meaningless figure juggling” (maj. opn., ante, at pp. 242-242), as the majority complains; under one compensation scheme employees are burdened with a disincentive to file workers’ compensation claims and have an incentive to pressure their peers not to submit valid claims; under the other, these perverse incentives disappear.
*253IV
I do not disagree with the majority that an employer may offer incentives to employees based on their efforts to increase revenue and to reduce some costs. The Legislature has made a judgment that workers’ compensation costs may not be wholly or partially recaptured from employees by docking their compensation in response to cost increases. Such a financial arrangement turns the workers’ compensation scheme on its head, forcing employees to subsidize their own insurance against industrial injury, a burden this state has chosen to place exclusively on employers. We are not at liberty to disturb the Legislature’s judgment in this regard. I respectfully dissent.
Kennard, 1, and Moreno, J., concurred.

 All further unspecified statutory references are to the Labor Code.

 While the majority acknowledges this principle, it does not apply it, and after citing the language of section 3751 once, never again attempts to discern the full statutory text’s meaning or address its implications.

 Perhaps it might. So might simply requiring employees to pay their own workers’ compensation awards.

 Arguably, similar principles extend to Ralphs’s deduction of cash and merchandise shortages in the bonus calculation formula. (See Cal. Code Regs., tit. 8, § 11070 [prohibiting deductions for shortages absent employee malfeasance]; Kerr’s Catering, supra, 57 Cal.2d at pp. 322-323 [sustaining regulation making it unlawful to subtract shortages from wages]; Ralphs Grocery, supra, 112 Cal.App.4th at pp. 1104-1105 [holding unlawful calculation of bonus according to formula that included deduction for shortages]; Quillian v. Lion Oil Company (1979) 96 Cal.App.3d 156 [157 Cal.Rptr. 740] (Quillian) [same].) Notwithstanding anything in the majority’s opinion that might suggest employers are free to take deductions from employees’ earnings absent an explicit prohibition (see maj. opn., ante, at p. 236), the Labor Code plainly prohibits employers from taking deductions from employees’ wages unless specifically authorized. (§§221, 224.) However, analysis of Prachasaisoradej ’ s section 3751 claim is sufficient to demonstrate that, as the Court of Appeal correctly concluded, Prachasaisoradej ’ s complaint should have survived demurrer. Accordingly, I do not dwell on his remaining claims.

 The consequence of the majority’s formalistic approach is striking. Suppose an employer “offer[s] or promise[s] as compensation” to its employees $15 per hour less $3 per hour for each workers’ compensation claim filed by the employee. The deduction is made before any amount is offered or promised to the employee; only the final offered amount constitutes wages; and this method of calculating wages is thus entirely consonant with the majority’s application of section 3751. It is not, however, consonant with the Legislature’s intent to leave workers’ compensation costs with employers, not their employees.
The majority asserts that in this $15 minus $3 hypothetical, the $15 is actually the promised amount from which no deductions may be taken. (Maj. opn., ante, at p. 238, fn. 11.) In doing so, it only reinforces that its selection of the point at which to label a payment “earnings” is arbitrary and a matter of convenience, not based on any clear legal principle capable of predictable application.

 Moreover, even if these cases were distinguishable in any material respect, none interpreted section 3751, and none offers any basis for reading the broad language of section 3751 more narrowly than its plain language warrants.

 From the complaint, it appears Ralphs is choosing its formula arbitrarily, building it from the ground up. To the extent its store performance figure may be loosely based on EBITDA (earnings before interest, taxes, depreciation, and amortization), EBITDA is a non-GAAP (generally accepted accounting principles) economic measure and may be calculated almost any way Ralphs pleases.