Litigating California Wage & Hour and Labor Code Class Actions

IWC had the authority to promulgate Section 8. In explaining its reasoning, however, the
California Supreme Court used sweeping language and invoked several provisions from
the California Labor Code, such as Section 221 (which precludes an employer from
demanding an employee pay back wages once the wages are earned), and Sections 400-
410 (which limit employers’ rights to seek cash bonds from employees). The court did not
hold that those Labor Code provisions barred deductions for cash shortages, but rather
held that the public policies that underlie those Labor Code Sections gave the IWC
authority to enact Section 8.
Later cases read Kerr’s Catering to say that the Labor Code itself barred deductions for
“unanticipated losses” or “business losses that may result from the employee’s simple
negligence.” 61 By locating this anti-deduction rule in the Labor Code rather than the Wage
Orders, these decisions effectively nullified Section 1(A) of the Wage Orders, which
provides that the anti-deduction rules within Section 8 do not apply to exempt
administrators, professionals, or executives. 62 If the anti-deduction rule stems from the
Labor Code rather than Section 8, then it applies to exempt and non-exempt employees.
B. Unlawful Bonus Plans
Based on the broad anti-deduction dicta in cases that cited Kerr’s Catering, some class
actions were filed alleging that certain bonus plans violated Labor Code Section 221 and
Sections 400-410 when the size of the bonus was determined in any part by the level of net
profits of the business. Although an appellate court adopted much of the plaintiffs’
reasoning in the 2003 opinion Ralphs Grocery Co. v. Superior Court (Ralphs I), 63 the
California Supreme Court in Prachasaisoradej v. Ralphs Grocery Co. (Ralphs II) 64 rejected
much of that decision and instead held that net-profit based bonus systems are lawful.
The plaintiffs had reasoned that net profits were reduced when merchandise in the store
was lost or broken or when cash went missing from the cash register. Accordingly, they
argued, reducing an employee’s bonus when net profits decreased was tantamount to
holding the employee personally liable for “business losses” that were not the employee’s
fault. Furthermore, these plaintiffs also turned to Labor Code Section 3751, which forbids
employers, “directly or indirectly,” to “exact or receive from any employee any contribution,
or make or take any deduction from the earnings of any employee” to pay for workers’
61
62
63
64
Hudgins v. Neiman Marcus Group, Inc., 34 Cal. App. 4th 1109, 1118 (1995) (discussed infra); see also Quillian v. Lion
Oil Co., 96 Cal. App. 3d 156, 162-63 (1979) (citing Kerr’s Catering for the principle that the Labor Code itself bars
unexpected deductions for losses not the result of an employee’s willful misconduct).
Section 1(A) provides that “[p]rovisions of Sections 3 through 12 shall not apply to persons employed in administrative,
executive, or professional capacities.”
112 Cal. App. 4th 1090 (2003).
42 Cal. 4th 217 (2007).
Seyfarth Shaw LLP | www.seyfarth.com Litigating California Wage & Hour Class Actions (12th Edition) 19