This month’s experts are
Doug Dexter and Diego Acevedo, attorneys with the Employment Practices Group of
law firm Farella, Braun + Martel LLP.
Section 2802 of the
California Labor Code requires employers to indemnify—or reimburse—employees for
all necessary expenditures or losses they incur as a direct consequence of
performing their job duties. The state Department of Labor Standards
Enforcement (DLSE) recently issued proposed regulations for complying with Section
2802. Employers had hoped the regulations would provide much-needed clarity,
but as you’ll see, they instead threaten to impose a minefield of requirements that
may increase compliance costs. Meanwhile, a case is pending before the
California Supreme Court that could be the final word on how employers
reimburse employees for work-related expenses.
The Gattuso Case
The language of Section
2802, although seemingly straightforward, provides no direction for
reimbursement methods. That problem was recently illustrated in a
appeals decision1 involving outside sales representatives (OSR) who spent much of their
work time traveling in their personal automobiles. The class action suit was
filed by OSRs Frank Gattuso and Ernest Sigala, who alleged that their employer,
Harte-Hanks Shoppers, did not reimburse their automobile expenses. Harte-Hanks
countered that the OSRs were paid a higher hourly rate to cover those
automobile expenses. Thus, Harte-Hanks argued, it did not need to pay
additional reimbursement based on expenses the OSRs actually incurred.
An appeals court agreed
that the increased hourly rate might satisfy Section 2802 reimbursement
requirements. In its opinion, the court considered two questions: 1) whether
Section 2802 required either reimbursement for expenses incurred or payment of
a reasonable per mile rate; and 2) whether an agreement for increased
compensation amounts to a waiver of Section 2802 benefits, which is prohibited
by Labor Code Section 2804.
Examining both the state
Industrial Welfare Commission Wage Orders and the DLSE policies, the court
found no stated or implied prohibition against agreeing to pay increased
compensation in order to indemnify employee expenses. The court, however, said
the employer must demonstrate that the increased compensation fully reimbursed
actual expenses—after taxes. The court explained that paying increased
compensation instead of reimbursement would violate Section 2802 only if the
increased compensation is insufficient to indemnify the employees for their
auto expenses, including taxes they must pay on the increased compensation.
The ruling’s practical
effect is to nullify the benefits of using agreements for increased
compensation. These agreements are usually adopted as a substitute for actual
indemnification to reduce the need for additional business tracking and
redemption mechanisms. However, after the Gattuso case, an employer still faces
liability in spite of the existence of such an agreement. To avoid a lawsuit,
an employer still must track actual expenses so it can ensure that it is paying
a rate equal to or higher than the actual expenses incurred. The only other
option for an employer under such an agreement is to pay a premium (after
taxes) that is unquestionably higher than the expenses its employees would
incur. Either alternative greatly reduces the attractiveness of using increased
compensation as a substitute for actual indemnification. In February 2006, the
California Supreme Court granted review of the Gattuso case—but for the time
being, the appeals court ruling is the last court direction concerning Section
2802.
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.
Proposed Regulations
In response to the
Gattuso decision, the DLSE has proposed new regulations that don’t allow
employers to use the increased compensation approach to reimbursement. These
regulations would instead require employers to reimburse employees for their
business-related use of personal vehicles by either using the IRS mileage rate
or by paying the actual costs of reimbursement. The regulations would obligate
employers to keep daily mileage records for three years and set specific
timetables for paying expenses. Employers would have to provide employees with
itemized statements regarding the actual expenses covered by each check
distributed.
The proposed regulations
also provide rules for payment of other travel-related expenses, including
meals and lodging (on a per diem basis), tolls, parking, rental cars, laundry,
and the costs of mailing and processing expense reimbursements. Finally, the regulations
allow the DLSE to hear claims arising under Section 2802 and permit claimants
to seek attorney’s fees in either a judicial or administrative proceeding.
The Impact on Employers
Employers are currently
in limbo on this issue. The DLSE has until December 2007 to finalize the
proposed regulations. In the meantime, the Gattuso case is pending before the
California Supreme Court. The outcomes could lead to contradictory directives.
The appeals court in the
Gattuso case repeatedly noted that the DLSE has been silent on the allowed reimbursement
methods. If the California Supreme Court affirms Gattuso, it would likely
mention that silence. Yet, if the DLSE adopts these proposed regulations, that
justification would no longer be accurate. Still, if the high court finds that
Section 2802 indeed allows reimbursement through enhanced compensation, that
reasoning might preclude the DLSE from adopting contrary regulations. On the
other hand, if the state Supreme Court reverses the Gattuso decision, finding
that increased compensation doesn’t comply with Section 2802, that would be
consistent with the proposed regulations.
Consequently, employers
will want to track the status of both the Gattuso case and the DLSE proposal.
Meanwhile, with respect to automobile expenses, the safest course for employers
is to track mileage and reimburse in accordance with the IRS mileage schedule.
_
1 Gattuso v. Harte-Hanks
Shoppers,
Court of Appeal (Dist. 2) No. B172647, 2005