HR Management & Compliance

Reimbursements: Can You Give Us Some Help on Employee Expense Reimbursements?

We’re trying to revise our travel reimbursement policies, and we need some help. We’re trying to simplify. Can we pay a per diem? Meanwhile, we’d rather just pay employees a set amount more in salary and not hassle at all with receipts and vouchers for every little thing. I understand that there’s a case now that may help us out. — Sherman, HR Manager in San Diego

The HR Management & Compliance Report: How To Comply with California Wage & Hour Law, explains everything you need to know to stay in compliance with the state’s complex and ever-changing rules, laws, and regulations in this area. Coverage on bonuses, meal and rest breaks, overtime, alternative workweeks, final paychecks, and more.

Good question. Unfortunately, as things now stand, there is no definitive answer. Under Labor Code Section 2802, an employer is required to “indemnify” (reimburse) his or her employee for “all necessary expenditures or losses incurred in direct consequence of the discharge of his or her duties.” This provision has been in the Labor Code since at least 1937. There are no existing regulations under it and very little case law has developed under it.

You are correct that a state appeals court ruling (Gattuso v. Harte-Hanks Shoppers, Inc., 133 Cal. App. 4th 1985 (2005)) allowed employers to include in an employee’s salary an additional amount to cover expenses. The process to do so, however, would be a little cumbersome. There would have to be an agreement indicating the amount that is intended to cover expenses, and the employer ultimately might have to prove the additional salary—after taxes—covered the actual expenses or at least a reasonable amount of expenses. Gattuso was appealed to the California Supreme Court, which accepted review of the case. This means that the appellate court decision is “depublished” and cannot be cited to support the proposition that additional salary can be used to reimburse employee expenses. The case has been fully briefed since June 2006, but no date has been set for oral argument.

Adding to this confusion, the California Labor Commissioner, evidently unhappy with the Gattuso decision and the possibility that the Supreme Court might affirm it, has issued proposed regulations that would essentially prohibit the practice Gattuso permitted. Whether the Supreme Court will be influenced by the proposed regulations, either negatively or positively depending on your point of view, remains to be seen.

The proposed regulations essentially would allow two methods of satisfying Section 2802 in terms of mileage, meals, and lodging: Pay either actual expenses, or the mileage or per diem rates for meals and lodging set by the IRS. The proposed regulations also would require payment for “other travel expenses” such as tolls, parking, rental vehicles, and laundry on an “actual cost” basis. These regulations can be found at the DIR website and describe in more detail the rules for using a per diem amount to cover certain expenses. Clearly, per diems could not be used to cover all expenses that an employee might incur.

A hearing on the proposed regulations was held on Feb. 7, 2007, which was also the final day for submitting written comments on them. These regulations must be finalized by December 2007, one year after being proposed, or they will expire.

Until the Labor Commissioner’s rules are final or expire and the California Supreme Court has ruled, employers should take the safe route by using the IRS mileage rate and reimbursing actual expenses. These clearly have been acceptable to the Labor Commissioner over the years. However, there has been little guidance or experience regarding use of per diems for meals and lodging at IRS rates, though government employees have been using them for years with few problems.

Lloyd W. Aubry, Jr., Esq., former California Labor Commissioner, is of counsel at the San Francisco office of law firm Morrison & Foerster.