California Supreme Court Confirms That Businesses May Increase Employee Compensation
in Lieu of Reimbursing for Work-Related Expenses
By Kathryn K. Meier, Esq.
Hoge, Fenton, Jones & Appel, Inc.
The California Supreme Court recently tested the boundaries of Labor Code section
2802, ruling that employers may increase employee compensation by a fixed amount
instead of reimbursing employees for work-related expenses.
California Labor Code section 2802 requires employers to indemnify (reimburse) employees
for all necessary expenses incurred as a result of performing their job duties.
Common reimbursements include mileage reimbursements and actual expenses for gas,
lodging and work supplies.
In Gattuso v. Harte-Hanks Shoppers, Inc. (November 5, 2007) S139555, employees sued
their employer for mileage reimbursement and other expenses. The Court found that
the employer, when it established the employees’ base salary and commission rate,
included an additional amount for business expenses, and ruled that the employees’
total compensation package satisfied the employer’s obligations under section 2802.
In reaching its ruling, the high court explained that employers must establish a
method to identify which portion of compensation is wages versus expense reimbursement.
The court stated that employees may challenge the expense payment amount if it does
not fully reimburse the employees for actual expenses necessarily incurred.
To comply with section 2802, the Court described three acceptable methods for an
employer to reimburse employees for work-related expenses: (1) the actual expense
method; (2) the mileage reimbursement method; and (3) the lump-sum payment method.
1. Actual Expense Method
The actual expense method requires employees to track their “fuel, maintenance,
repairs, insurance, registration, and depreciation” for both personal and business
use to submit to the employer, which the court found to be an “onerous burden.”
2. Mileage Reimbursement Method
Similar to the actual expense method, but less burdensome, the mileage reimbursement
method requires employees to track their miles driven for business duties. The employer
then reimburses a predetermined amount that reasonably accounts for the cost of
owning and driving a car per mile. Employers often use the IRS mileage reimbursement
rate, which is currently 48.5 cents per mile.
3. Lump-Sum Payment Method
A lump-sum payment generally is based on the employee’s job duties and the distance
he or she typically drives to perform those duties. The California Supreme Court
found this method of reimbursement presumptively sufficient to comply with section
2802. That is, an employer may enhance compensation such as base pay and/or commission
so long as it fully compensates the employee for actual expenses incurred.
The employee is permitted to challenge the lump-sum amount by comparing the enhanced
compensation with the amount he or she would get under either the actual expense
or mileage reimbursement method. If the lump-sum payment is inadequate, the employer
must make up the difference.
The employer must provide some means (a method or formula) to identify the amount
of the enhanced compensation that is provided as expense reimbursement. This allows
employers to readily determine wages versus reimbursement for purposes of complying
with other labor and tax laws.
IMPORTANCE TO CALIFORNIA EMPLOYERS
The California Supreme Court’s decision provides a less burdensome reimbursement
option for both employers and employees. While employers are still permitted to
use the actual expense method or the mileage reimbursement method (typically using
the IRS mileage rate), a lump-sum payment provides an alternative to onerous record
keeping. Using the lump-sum payment method relieves the burden on employers imposed
by the actual expense method because an employer is not required to use complex
allocation calculations, keep detailed records, or exercise frequent judgment regarding
the reasonableness of expenses to determine if they are “necessary.” Also, the lump-sum
payment method works particularly well for employers with employees who drive the
same route daily because mileage does not vary.
Kathryn K. Meier frequently conducts workshops for businesses and professional organizations
on a variety of topics in the employment law area, including wrongful termination,
proprietary agreements, wage and hour compliance, and sexual harassment. Ms. Meier
advises her clients on all aspects of human resources issues from pre-hiring through
termination of employees. She is an active member of the Santa Clara County Bar
Association, and previously served as its President in 1994.