Court Permits Employers to Reimburse Expenses Through Increased Wages.
California's employee-indemnification law, Labor Code section 2802, generally requires employers to reimburse any expenses incurred by employees in carrying out their job duties. A California appellate court has ruled, however, that employers may satisfy this obligation by paying increased wages or commissions instead of tracking and reimbursing the actual expenses incurred.
In Gattuso v. Harte Hanks Shoppers, Inc., ___ Cal.App.4th ___ (2005), the plaintiff had sought to certify a class of outside sales people who used their own vehicles to deliver papers. The plaintiffs claimed that the employer had violated California's employee expense reimbursement law because it neither reimbursed their actual out-of-pocket expenses, including gas and maintenance, nor paid a fixed mileage-based reimbursement amount. The employer countered that it had entered into compensation arrangements with individual workers which had been specifically designed to incorporate reasonable amounts for expense reimbursement in the form of increased wages and commissions. After examining the history and purpose of the Labor Code's reimbursement provision, the Court agreed that this was a legitimate method of expense reimbursement.
The court reasoned that "the statute does not specify any particular method by which the employer must indemnify employees for necessary expenditures or losses. And nothing in the statute indicates that the Legislature intended to create one exclusive method for such indemnification." Id. at __. As the Court explained:
[Labor Code] section 2802 does not preclude Harte-Hanks from indemnifying its [employees] for their automobile expenses by paying increased compensation, even if other provisions of law may treat that compensation as taxable wages. A violation of section 2802 would occur only if the increased compensation was insufficient to indemnify the [employees] for the automobile expenses incurred in the discharge of work-related duties. Any taxes the [employees] are obligated to pay on the increased compensation should be taken into account in determining whether Harte-Hanks is indemnifying the [employees] for all of their automobile expenses.
Under the Court's ruling, employers and employees are thus free to work out reasonable compensation arrangements that obviate the administrative burden of submitting time-consuming expense reports and processing frequent expense reimbursement checks.
The Court in Gattuso, however, did not go on to decide whether these special compensation arrangements sufficiently covered each employee's actual automobile expenses (click here for related article on the IRS mileage rate). And employers who want to use this compensation-based reimbursement method will have to be careful to fully document the arrangement and to make certain that it reasonably reflects the expenses actually incurred by each employee.
Notwithstanding these caveats, however, Gattuso is an unusually pragmatic and common sense development. This is a welcome development for employers in the area of California employment -- in which the general historical trend has been toward imposing ever more complicated and burdensome administrative requirements.