California Labor & Employment Law Blog

Earlier this week, the California Supreme Court issued its decision in Gattuso v. Harte-Hanks Shoppers, Inc. and addressed the issue of whether an employer may satisfy its obligation to reimburse employees for employment-related expenses by paying increased wages and/or commissions instead of separately reimbursing them for actual expenses.  The Court determined that an employer may satisfy its obligation by paying increases in base salary or in commissions rates, or both (referred to as the “lump sum” payment method), provided there is a means to apportion the enhanced compensation to determine what amount is being paid for labor performed and what amount constitutes reimbursement for business expenses.

Specifically, Labor Code section 2802(a) requires that an employer indemnify its employees for expenses necessarily incurred in the performance of their job duties.  Harte-Hanks required its outside sales representatives to drive their own automobiles on sales calls, and compensated both outside and inside sales representatives by commissions on sales or by a combination of salary plus commissions.  In response to the lawsuit filed by an outside sales representative, Harte-Hanks argued that it satisfied its obligation to reimburse outside representatives for expenses related to the use of their own automobiles by paying them higher base salaries and higher commission rates than were paid to inside sales representatives.

The Court recognized the burden that would be imposed on both parties by requiring the use of the “actual expense” method, whereby employees must keep track of expenses to include fuel, maintenance, repair, insurance, registration and depreciation. In finding that the “lump sum” payment method was lawful, the Court noted that the employee must be permitted to challenge the payment made under the “lump sum” method by comparing that amount to the amount due under the “actual expense” method or the mileage reimbursement method. Finally, the Court noted that employers using the “lump sum” method should, in providing wage documentation as required by Labor Code section 226, identify the amounts that represent payment for labor performed and those that constitute reimbursement for business expenses.

Given this ruling, California employers should reevaluate how they can best reimburse expenses incurred by their employees. Please contact any attorney at Carlton DiSante & Freudenberger to discuss any questions you may have about implementing an expense reimbursement program in your workplace.