The California Supreme Court has issued two favorable decisions that mark a victory for employers on issues of disability discrimination and bonus plans. In Green v. State of California, No. S137770 (Cal. Aug. 23, 2007) the Court held the burden is on the employee, not the employer, to prove he or she can perform the “essential” functions of his or her job, with or without reasonable accommodation. On the same day, in Prachasaisoradej v. Ralphs Grocery, No. S128576 (Aug. 23, 2007), the Court held a company’s bonus plan can lawfully provide bonus compensation that takes into account ordinary operating losses, workers’ compensation costs, tort claims and other business expenses beyond the employee’s control.

A. Green v. State of California: Employees, Not Employers, Must Prove Ability to Do Job

In Green, the Court considered whether under the California’s Fair Employment and Housing Act (FEHA), an employee or the employer bears the burden of proving the employee is capable of performing the essential duties of the job. The lower courts were split on the issue. Under the federal statute, the Americans with Disability Act (ADA), employees bear this burden and must prove as part of their prima facie case they can perform the essential functions of their job.

The California Supreme Court in Green, ruled 4-3 that like the ADA, under the FEHA, the employees (not the employer) have the burden of proving they can perform their essential job functions with or without reasonable accommodation.

In Green, plaintiff suffered from Hepatitis C and was placed on light duty at the request of his doctor. After several complications Green was denied his request to return to his original job and effectively forced Green into retirement. He had worked as a stationary engineer at a correctional facility for more than 12 years before he was placed on disability retirement. Green sued for disability discrimination and the jury found for Green and awarded him $2.6 million. The California appellate court also found for Green and held that Green did not have to prove his capacity to perform essential duties of the job, rather it was the employer's burden. Due to the split in California authorities the California Supreme Court granted review of this case.

The Supreme Court overturned the lower court’s decision. It found that just as under the ADA, the burden is on the employee to demonstrate that he or she can do the job. The Court explained that the legislature “incorporated the ADA requirement with full knowledge of the purpose the language serves in the ADA – as a means of distinguishing permissible employment practices from impermissible disability discrimination based on the employee’s ability to perform in the particular employment position with reasonable accommodation.” The Court further opined that FEHA makes it “clear that drawing distinctions on the basis of physical or mental disability is not forbidden discrimination in itself. Rather, drawing these distinctions is prohibited only if the adverse employment action occurs because of a disability and the disability would not prevent the employee from performing the essential duties of the job, at least not reasonable accommodation.”

California employers should continue to exercise caution when faced with an issues related to disability or medical leaves as the protections and scope of FEHA are broader than the ADA. Employers should:

  • Engage in the interactive process to determine whether there is need for reasonable accommodation.California law places a great burden on employers to demonstrate evidence of the interactive process and all efforts should be well documented.To that end, clear policies and job descriptions will assist.
  • Review existing policies to ensure they properly articulate the employers intent to engage in the interactive process and provide reasonable accommodation.
  • Review existing policies to ensure procedures are in place for administering requests for accommodation.
  • Train managers and human resources executives to increase awareness and ensure compliance.

B. Prachasaisoradej v. Ralphs Grocery: Bonus Plans Based On Profitability Are Permitted

In Ralphs, the California Supreme court found employers may implement lawful profit-based bonus programs. In this case Ralphs had an incentive plan that calculated bonuses by taking into account, at each individual store, the total earnings, less store expenses and losses due to cash shortages, merchandise shortages and shrinkage, workers’ compensation, tort claims by nonemployees, and other losses beyond the employees’ control. Eligible employees received bonuses that were calculated using this formula, in addition to their regular wages. Their regular wages were not impacted by the store’s profitability.

Plaintiff was a produce manager who claimed that the expenses (i.e. store expenses and losses due to cash shortages, merchandise shortages and shrinkage, workers’ compensation, tort claims by nonemployees) and other losses beyond the employees control should not be considered in the formula used to calculate the employee bonuses and sued on behalf of a class of similarly situated employees. The California appellate court agreed with Plaintiff.

The California Supreme court reversed the lower court’s decision, finding the deductions specified in Ralph’s plan were not unlawful. The Court found Ralphs properly paid employee wages, “the amount that the employer has offered or promised to pay or has paid pursuant to such an offer or promise, as compensation for that employee’s labor.” The Court further explained:

The Plan was not illegal, we conclude, simply because, pursuant to normal concepts of profitability, ordinary business expenses, such as storewide workers’ compensation costs, and storewide cash and merchandise losses, were figured in, along with such other store expenses as electric bill and the cost of goods sold, to determine the store’s profit, upon which the supplementary incentive compensation payments were calculated. By doing so, Ralphs did not illegally shift those costs to employees. After fully absorbing the expenses at issue, Ralphs simply determined what remained as profits to share with its eligible employees in addition to their normal wages.

Employers are cautioned to closely review any existing bonus or incentive compensation policies as this continues to be a hotly contested area. Some quick fixes include:

  • Carefully review existing bonus plans and policies to ensure they clearly articulate how an employee can qualify for the bonus.
  • Ensure employees are paid for all hours worked and all sums “promised to pay.”
  • If the bonus calculations take into account profitability, they should not promise compensation in a measurable amount that is then reduced by operating expenses.