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This is in California.

I quit a job over a year ago and finally, just recently, got the last profit-sharing benefit. But when I saw the amount, it looks like I got 3-5% of my wages for the eligible period, whereas active employees got the maximum: 15%.

Seeking clarity, I looked into the employee manual that was given to me, and found this in the relevant section:

RETIREMENT BENEFITS After one year of continuous service, employees are eligible to participate in [Company]'s 401(k) Profit Sharing plan. Under the conditions of [Company]’s 401(k) plan, the company will contribute from 3% to 15% of the employee's annual compensation to the employee's choice of investment funds offered in the plan. Each year the company management reviews the financial performance of the company and determines the rate of its contribution, to the 401(k) PS plan for that year. Each employee receives a contribution based on the eligible time worked during the fiscal year.

Seeking further explanation from the CFO, she wrote me this:

In order to be eligible for the discretionary profit sharing contribution in any plan year ( the 12-month period from 4/1 to 3/31), an employee must have worked at least 1,000 hours in that year and have worked on the last day of the plan year. The number of prior years the employee was in the plan or worked is not relevant, and the only exceptions do not apply to ordinary voluntary or involuntary termination of employment.

I meet the 1k hours requirement. I did not work the last day. Are they breaking the law in reducing the profit-share benefit because I did not work the last day of the plan year?

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    I have edited this so that it more clearly asks what the law is, not what the OP should do. I don't think it should now be closed as asking for specific legal advice. – David Siegel Jan 23 at 5:00
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The company has no legal obligation to provide any profit sharing plan at all. Unless the employee manual constitutes a contract, or there is some other contract between the employee and the company in which the rules of the plan were spelled out, the company can change the rules at any time, without notice. Thus any suit would be likely to be dismissed early on.

Consult a lawyer with experience of California employment law to check this. An initial consultation would quite likely be available free or low cost, and if such a suit is out of the question, a lawyer should be able to tell you that during the initial consult.

Oddly, I suspect that the CFO is misstating the company's policy. If it were the case that:

In order to be eligible ... an employee must have worked at least 1,000 hours in that year and have worked on the last day of the plan year.

it would seem that you would have gotten nothing at all, not 5%. If their policy is that:

Each employee receives a contribution based on the eligible time worked during the fiscal year.

Could it be that you were simply pro-rated based on the time you worked? I can't tell of course, not having all the facts (nor should you post them on the net, in my view). But in any case they would have been within their rights to have a lower percentage for employees who leave during the year, as the point of such plans is to induce future loyalty and performance, obviously not relevant to someone who has already left.

EDIT Another answer has cited Schachter vs Citigroup, inc. 47 Cal.4th 610 (2009) as establishing that the proceeds of an incentive plan are wages, at least for the kind of plan at issue in Schachter. Howver this igmores several facts about Schachter.

First of all, the employee in Schachter lost, reciving neither the stock not the cash wages that had been diverted to purchase the stck. the "forfeiture plan" was upheld.

Secondly, the plan in Schachter was an optional plan, where part of the employee's base wages were used to purchase stock in the company at a discount, with a proviso that the stock would be forfeit if the employee resigned or was discharged for good cause within 2 years. Many incentive or profit-sharing plans are instead additional compensation, and the employee's base pay is not diminished. In such plans the employee usually does not have an option about whether to participate. The question does not say exactly what sort of plan is at issue here.

in Schachter the court wrote:

Before Schachter can argue that the Plan constitutes an improper agreement under section 219, he must demonstrate that the Plan's forfeiture provision violates sections 201 and 202, the statutes governing wage payment upon termination or resignation. This he cannot accomplish.

...

it is settled that an employer may unilaterally alter the terms of an employment agreement, provided such alteration does not run afoul of the Labor Code. (DiGiacinto v. Ameriko-Omserv Corp. (1997) 59 Cal.App.4th 629, 637

...

Schachter necessarily agreed his compensation would consist of cash payments and a retention-based conditional interest in the shares, with the latter being earned only if he remained with [the company] for two years. He elected not to remain for the designated period .... Accordingly, Schachter did not earn—and thus had no right to receive— either the restricted stock or the funds used to purchase it.

...

Eligibility to receive incentive compensation "is properly determined by the ... plans' specific terms and general contract principles." (Neisendorf)

"nothing in the public policy of this state concerning wages ... transforms [a] contingent expectation of receiving bonuses into an entitlement" (Neisendorf, 143 Cal.App.4th at p. 522). Only when an employee satisfies the condition(s) precedent to receiving incentive compensation, which often includes remaining employed for a particular period of time, can that employee be said to have earned the incentive compensation (thereby necessitating payment upon resignation or termination).

...

Schachter additionally asserts that his incentive compensation, like vacation pay, should vest on a pro rata basis, entitling him to at least some payment upon resignation. We disagree.

In short, the court in Schachter did not hold that an employee who resigned before the specified future date in an incentive plan was entitled to incentive pay, contrary to the terms of the plan. Indeed it held just the opposite. That court also held that employers could unilaterally change the terms of such a plan at any time.

  • It is common sense --and follows almost from definition-- that the point of a profit sharing plan is to incentivize profit, not necessarily to induce loyalty in the form of "not quitting". More important, your assertions to the OP are wrong and contrary to case law cited in Schachter v. Citigroup, Inc., 47 Cal.4th 610, 618 (2009) (establishing that profit-sharing plans are encompassed in the statutory definition of wages). The OP's termination/resignation does not strike his entitlement to the payment of his earned & unpaid wages. – Iñaki Viggers Jan 23 at 12:56
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    My California-based company has similar requirements: must have worked at least 1000 hours in the plan year and be on payroll on the last day of the plan year: December 31. If OP wasn't employed on the last day of the plan year, I think he's lucky they gave him anything. – mkennedy Jan 23 at 18:44
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    @Iñaki Viggers I think you have badly misread Schachter. See my edited answer for details. While the employer's motive is of only limited relevance, it is surely to maximize profit for the employer. The employer may well thing (and many do think) that a stable, long term, and productive work force leads to employer profit, and therefore seek to induce employees both to remain and to be productive. – David Siegel Jan 24 at 18:17
  • @DavidSiegel You are misapplying Schachter and ignoring the excerpt I pasted in bold. (1)The OP's employee manual nowhere reflects a requirement "[to] have worked on the last day of the plan year" as condition precedent for the profit-sharing plan. (2)There is no indication that the OP consented to that unilateral "alteration" during his employment there. (3)The only condition precedent for his inclusion in the PS plan is "a year of continuous service", which the OP met (his question does not reflect the contrary). Other than that, OP's matter involves no "contingent" expectation. – Iñaki Viggers Jan 24 at 20:22
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    @Iñaki Viggers I did read it, it just isn't relevant in the way you seem to think. I read the whole decision. A **unilateral ** change to the plan is one to which the employee need not consent. The incentive pay may be wages but still not owing on resignation. We don't have the whole employee manual, nor, more importantly, the actual plan document. The OP will need to show these in full to an actual lawyer to have a good chance of knowing what his rights are. – David Siegel Jan 24 at 21:11
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Am I owed this profit-sharing benefit after quitting?

Yes. The CFO's alleged "interpretation" is wrong on several levels (as is usual when an employer is asked to interpret clauses when these would benefit the employee).

Schachter v. Citigroup, Inc., 47 Cal.4th 610, 618 (2009) explicitly recognizes profit-sharing plans as wages encompassed by the California Labor Code in Section 200 et seq:

A wage is defined as "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." (§ 200, subd. (a).) We construe the term "wages" broadly to "include not only the periodic monetary earnings of the employee but also the other benefits to which he is entitled as a part of his compensation." (Wise v. Southern Pac. Co. (1970) 1 Cal.3d 600, 607 [83 Cal.Rptr. 202, 463 P.2d 426].) "Courts have recognized that `wages' also include those benefits to which an employee is entitled as a part of his or her compensation, including money, room, board, clothing, vacation pay, and sick pay. (E.g., Suastez v. Plastic Dress-Up Co. (1982) 31 Cal.3d 774, 780 [183 Cal.Rptr. 846, 647 P.2d 122]; Department of Industrial Relations v. UI Video Stores, Inc. (1997) 55 Cal.App.4th 1084, 1091 [64 Cal.Rptr.2d 457].)" (Murphy v. Kenneth Cole Productions, Inc. (2007) 40 Cal.4th 1094, 1103 [56 Cal.Rptr.3d 880, 155 P.3d 284].) Incentive compensation, such as bonuses and profit-sharing plans, also constitutes wages. (See Neisendorf, supra, 143 Cal.App.4th at p. 522; Lucian v. All States Trucking Co. (1981) 116 Cal.App.3d 972, 974 [171 Cal.Rptr. 262]; Ware v. Merrill Lynch, Pierce, Fenner & Smith, Inc. (1972) 24 Cal.App.3d 35, 44 [100 Cal.Rptr. 791].)

(emphasis added)

The clause on retirement benefits nowhere purports the 3%-15% contribution to be contingent on the employee "hav[ing] worked on the last day of the plan year". The clause is only in terms of the "time worked during the fiscal year". The CFO's mention of "plan year" is only an attempt to confuse you. The clause speaks only in terms of fiscal year.

Absent an indication to the contrary elsewhere in your contract, employee manual, or the company's 401(k) plan, the CFO appears to be wrong also by purporting that the employer's contribution is "discretionary". The criteria outlined in the "Retirement Benefits" clause for determination of contribution are:

  • one year of continuous service;
  • management's review of the financial performance of the company; and
  • [employee's] time worked during the fiscal year.

Contrary to what the CFO now alleges, none of these criteria is of discretionary nature.

It is also unclear from where the CFO is bringing up the threshold of 1,000 hours. This might be stated elsewhere in the employee manual or your contract. Regardless, assuming arguendo that the threshold is specified somewhere else, that is not a discretionary criterion either.

Furthermore, the clause nowhere indicates that the rate of contribution is to be determined on a case-by-case basis. Instead, the rate of its contribution depends on management's review of the financial performance of the company, that is, as a whole. This means that the company ought to determine one single rate that will apply to all eligible employees. In turn, that common rate is to be pro-rated according to the eligible time [that each eligible individual] worked during the fiscal year.

The issue of whether or not an employee manual is binding depends on the general understanding that can be adduced from the manual and/or your contract. That general understanding might indicate whether or not the document at issue is to be construed as a contract.

In your manual, contract, agreements, etc., you will need to search for language in the sense that the employee manual "is not, and shall not be construed to create [any contract], express or implied". See the [nonprecedential] decision Bergiadis v. Fred Loya Ins. Agency, Inc., No.B249276 (CA Court of Appeals, Oct. 29, 2014), at section "The Agreement is an agreement to arbitrate".

Even if your contract or manual directly or indirectly (by calling itself "non-binding") excludes profit-sharing plans from the definition of wages, that language might fall on its face as per (1) Sections 201 & 202 of the Labor Code and, (2) the explicit remark in Schachter about profit-sharing plans.

As an example where general understanding from an employee manual is binding, see Richey v. Autonation, Inc., 60 Cal.4th 909, 915 (2015):

The arbitrator found that although the employee manual was "poorly written," "*there was a general understanding** at Power Toyota that [...]"

(emphasis added)

The point to make about Richey is the Supreme Court of California's endorsement of a decision that was premised on the employee manual (as opposed to the necessity of being a contract).

  • @Dave In that case, I strongly encourage you to study the aforementioned decisions Bergiadis and Schachter. [Non-precedent] Bergiadis because of how the appellate court identified the limited scope of "this is not a contract". And Schachter because profit-sharing plans are classified as wages. Some clauses in your contract or other documents might supersede or contradict the supposedly "non-binding" status of portions of the handbook. You might still have a case, but it is hard to identify and pinpoint those subtleties in your matter without knowing the contents of your docs. – Iñaki Viggers Jan 24 at 9:21
  • Whoops, replacing my original comment with company name redacted... I found this section in the handbook: However, this handbook cannot anticipate every situation or answer every question about employment. It is not an employment contract and is not intended to create contractual obligations of any kind. Neither the employee nor Company is bound to continue the employment relationship if either chooses, at its will, to end the relationship at any time. – Dave Feb 2 at 18:40
  • It is ridiculous and shady to downvote this answer while failing to articulate what is supposedly "wrong" with it or with the case law on which the answer is premised. – Iñaki Viggers Jun 25 at 11:00
  • @DavidSiegel's answer and comments provide a reasonable basis for someone to decide to downvote without adding repetitive information. – George White Oct 21 at 23:51

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