When employees are
required to use their personal automobiles for business purposes, employers
typically reimburse them on a per-mile basis, using the Internal Revenue
Service mileage rate as the standard. But a recent case, now under review by
the California Supreme Court, has raised the question of whether other
reimbursement methods—such as simply paying an increased salary or commission—are
also acceptable under
law.
Employees Challenge
Reimbursement Method
The case involves
marketing company Harte-Hanks Shoppers, which employs outside and inside
salespeople to sell its products. Outside sales reps (OSRs) have to drive their
personal automobiles to perform their jobs and are paid higher base salary and
commission rates to compensate for their auto expenses.
Two OSRs for
Harte-Hanks’s
Gattuso and Ernest Sigala, filed a class action suit against Harte-Hanks
seeking to be paid back for the expenses OSRs incurred in using their personal
automobiles on the job. They pointed to a Labor Code section requiring
employers to reimburse employees for all necessary expenditures incurred in performing
a job. This provision, the employees contended, obligated Harte-Hanks to
reimburse them for actual auto expenses or to pay a per-mile rate and didn’t
permit increased salaries or commissions as an alternative. One problem with
the Harte-Hanks approach, the employees argued, was that the increased compensation
was taxed as ordinary income, while an actual reimbursement would not have
been.
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Other Methods OK
Now a
Labor Code permits employers to pay increased salaries or commissions instead
of reimbursing employees for actual auto expenses or paying a mileage rate.1 This is true, said the
court, even if other legal provisions such as the Tax Code treat the
compensation as taxable wages.
The court explained that
the reimbursement provision would be violated only if the increased
compensation was insufficient to cover the employees’ automobile expenses,
taking into account any taxes they’re required to pay. Finally, nothing in the
law limits the methods by which an employer may indemnify employees for auto
expenses or excludes Harte- Hanks’s method, the appeals court said.
Under Review
However, the California
Supreme Court has stepped in to review this decision, so until the high court
issues its ruling, it will remain unclear whether the law permits an increased
salary or commission as a way to reimburse workers for their auto expenses.
We’ll keep you posted.
In the meantime, however
you choose to reimburse employees for the business use of their automobiles, be
sure to keep detailed records of employee expense reports, your payments, and
any agreements with employees about the method you’ll use. Also, if you compensate
employees for auto expenses through increased salary or commission, be certain
the amount you give covers expenses and taxes. You can link to the case at
www.courtinfo.ca.gov/opinions/.
_
1 Gattuso v. Harte-Hanks
Shoppers,
Court of Appeal (Dist. 2) No. B172647, 2005