This month’s experts are
Tyler M. Paetkau, Esq., and Hilary J. Vrem, Esq., with the law firm of Littler
Mendelson, in
In Gattuso v. Harte-Hanks Shoppers, Inc.,
the California Supreme Court held that employers may reimburse employees for
business-related expenses by paying them increased compensation. But the court cautioned
that employers must itemize which compensation is for work performed and which
is for reimbursement of business-related expenses.
Background
Harte-Hanks Shoppers,
Inc., is a
business that prepares and distributes advertising booklets, including the PennySaver,
and employs both inside and outside sales representatives. Harte-Hanks
compensates all sales representatives either with commissions or with a
combination of base salary and commissions. In addition, Harte-Hanks reimburses
the outside sales representatives (OSRs) for business-related travel expenses
by paying increased commissions or higher base salaries than the inside sales
representatives are paid.
A group of OSRs brought
a class action seeking indemnification under California Labor
Code Section 2802 for expenses incurred while using their personal vehicles for
work. Section 2802 requires employers to indemnify (or reimburse) employees for
“all necessary expenditures or losses” an employee incurs in performing his or
her job. It defines “necessary expenditures or losses” to include “all
reasonable costs.” Harte-Hanks argued that it complied with this provision by
paying increased compensation. The OSRs, however, asserted that Section 2802
required the company to reimburse them for their actual business expenses on a
dollar-for-dollar basis.
400+ pages of state-specific, easy-read reference materials at your fingertips—fully updated! Check out the Guide to Employment Law for California Employers and get up to speed on everything you need to know.
Three Approved Methods
The California Supreme
Court identified three valid business expense reimbursement methods employers may
use.1
First, the “actual
expense” method requires employees to keep detailed records of all expenses
incurred and submit records to the employer for reimbursement. This method is
probably the most accurate way to reimburse employees, but it also is the most
administratively burdensome. That’s because employees must keep detailed records
of all automobile expenses they incurred in performing their jobs—such as fuel,
maintenance, repairs, insurance, registration, and depreciation—and employers must
then determine which of these expenses were necessary to the employees’ job
performance. Factors an employer can consider in determining which employee expenditures
were necessary include the expenses, as well as the purchase or lease price of
the automobile, an employee’s choice of vehicle model, and an employee’s choice
of brand and grade of fuel.
Second, employers may account such factors as fuel, maintenance, repairs, and depreciation. Because
use the “mileage reimbursement” method: Employees must only keep track of
business mileage, and the number of miles driven is multiplied by the IRS
mileage rate. The IRS rate, which now stands at 50.5 cents per mile, takes into
this reimbursement system is inherently less accurate than the actual expense
method, said the court, employees must be permitted to challenge the
reimbursement amount. “If the employee can show that the reimbursement amount
that the employer paid is less than the actual expenses that the employee has
necessarily incurred for work-required automobile use (as calculated using the
actual expense method), the employer must make up the difference,” the court
wrote.
The third approach the
court endorsed is the “lump sum” method, sometimes called a per diem, car allowance,
or gas stipend. This method, which Harte- Hanks used, does not require
employees to keep records or submit information to the employer. Instead, the
employer pays a fixed amount for reimbursement, derived from the employer’s
general understanding of the expenses employees incur, including the average number
of miles they drive or automobile-related expenses they incur.
The high court found
that Harte-Hanks’ lump sum method of reimbursing OSRs complied with
2802, said the court, does not proscribe or restrict the way you reimburse
employees as long as the method used provides employees with full reimbursement
for all of their actual expenses. The court cautioned that employers must take
into account potential tax consequences associated with different methods of
employee reimbursement to ensure compliance with Section 2802.
The court went on to
rule that employers may combine lump sum employee expense reimbursements with
payment of an employee’s regular compensation. As such, an employer may cover
expense reimbursements through an enhanced compensation plan or payment, such
as an increased base salary, commissions, or both. The court noted, however,
that an employer must provide a method or formula to identify the amount of the
combined employee compensation payment that is intended to provide expense
reimbursement.
Compliance Suggestions
Here are several
suggestions to ensure compliance with Section 2802 for employers that use a
lump sum reimbursement method:
• Employees can
challenge lump-sum reimbursements as being inadequate to cover actual expenses.
Thus, employers should consider providing a formal mechanism for employees to
challenge any alleged underpayments.
• Employers must
delineate which amount is intended to reimburse the employee for the
business-related expenses and which is compensation for work performed. To
comply with California Labor Code Section 226(a), which requires employers to
provide an “accurate itemized statement in writing” with each paycheck of
various payroll information, including gross wages, total hours worked, all
deductions, and net wages earned, employers should separately identify on the
wage statement the amounts that represent payment for labor performed and the
amounts that represent reimbursement for business expenses.
Proposed Reimbursement
Regulation
Employers also should
note that last year, the California Division of Labor Standards Enforcement proposed
a regulation regarding travel expense reimbursement, which includes auto expenses,
under Section 2802. The regulation, which is still under consideration, could
impose additional reimbursement requirements. It is available at
www.dir.ca.gov/dlse/2802Regs.htm.
_
1 Gattuso v. Harte-Hanks
Shoppers, Inc.,
Supreme Court No. S139555, 2007