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EMPLOYERS
MAY USE LUMP-SUM PAYMENTS TO
COMPENSATE EMPLOYEES FOR WORK-RELATED EXPENSES
On November 5th, the California
Supreme Court held that employers may use a lump-sum method to reimburse
employees for work-related expenses, as long as (1) the amount paid is
sufficient to fully reimburse employees for the expenses they necessarily
incur, and (2) the reimbursement is accounted for separately from their regular
income. See Gattuso v. Harte-Hanks Shoppers, Inc., 2007
The Law
California Labor Code section 2802
requires that employers indemnify their employees for all expenses they
necessarily incur in the discharge of their duties. This issue often arises in the context of
outside salespersons or others who must use their personal vehicles for work
purposes. It can be difficult and
burdensome to calculate actual vehicle expenses, since such expenses include
fuel, maintenance, repairs, insurance, registration, and depreciation. For this reason, employers have developed methods
to approximate vehicle expenses and meet their reimbursement obligations.
The most common method is to use a
reimbursement formula based on miles traveled.
Using this approach, the employee need only keep a record of the number
of miles driven on-the-job, and submit that information to the employer. The
California Department of Labor Standards Enforcement (DLSE)
has expressed its opinion that the mileage reimbursement method is
presumptively valid and satisfies the employer’s obligation under Labor Code
section 2802 if the employer uses the regularly updated Internal Revenue
Service (IRS) reimbursement rate in calculating its expense reimbursements for
work-related use of employee vehicles.
Another option for approximating mileage reimbursements is to pay the employee a fixed amount as an automobile expense reimbursement. This “lump-sum” method is often referred to by employers as “per diems” or “car allowances.” The amount of the lump-sum payment is typically based on the employer's understanding of the employee’s job duties, including the number of miles the employee typically or routinely must drive to perform those duties.
Gattuso
v. Harte-Hanks Shoppers, Inc.
Harte-Hanks is
an advertising company that prepares and distributes booklets (such as the PennySaver) across
Harte-Hanks does not separately
reimburse outside sales employees for their automobile expenses. Instead, Harte-Hanks takes the position that
it satisfies its obligation to compensate its outside sales employees for
vehicle expenses, as required by Labor Code section 2802, by paying them higher
base salaries and commission rates than it pays to inside sales employees.
At issue in Gattuso was whether Harte-Hanks
could reimburse its outside sales force for vehicle expenses using this
“lump-sum” method (i.e., giving the outside sales employees a higher base
salary and/or commission rate to approximate vehicle costs). In summary, the Gattuso court held that Labor
Code section 2802 does not prohibit an employer’s use of a lump-sum method to
reimburse employees for work-related expenses, as long as (1) the amount paid
is sufficient to fully reimburse employees for the actual expenses they necessarily
incur, and (2) the reimbursement is accounted for separately from their regular
income.
Two caveats are central to the
court’s decision. Although lump-sum
payments are lawful, an employee is still permitted to challenge the lump-sum
payment as being insufficient under Labor Code section 2802 by comparing the
lump-sum payment with the amount that would be payable under either the actual
expense method or the mileage reimbursement method. If the comparison reveals
that the lump-sum is inadequate, the employer is obligated to make up the
difference.
Additionally, if an employer
combines wages and business expense reimbursements in a single enhanced
employee compensation payment (i.e., higher base salary or commissions for
outside sales employees), the employer must be able to articulate the method or
formula used to identify the amount of the combined employee compensation
payment that is intended to provide expense reimbursement.
The fundamental lesson of Gattuso is that
employers who use lump-sum payments or “enhanced compensation” to reimburse
employees have no safe harbor. If, as is
likely, the lump-sum payment does not adequately compensate employees for their
actual vehicle costs, the employer is in violation of Labor Code section 2802.
Gattuso is also noteworthy from a
procedural standpoint. Both the trial
and appellate courts declined to certify Gattuso as a
class action, stating that “the determination of whether there was a meeting of
the minds and whether reimbursement was reasonable necessarily requires an
individualized inquiry as to each outside sales representative.” This was a significant victory for
Harte-Hanks – avoiding the time and expense of class action litigation in favor
of individual claims by those outside sales employees who felt they were
underpaid. Unfortunately, the California Supreme Court reversed and remanded
the case to the trial court to consider the following issues:
(1) Did Harte-Hanks adopt a practice or policy
of reimbursing outside sales representatives for automobile expenses by paying
them higher commission rates and base salaries than it paid to inside sales
representatives?
(2) If so, did it establish a method to
apportion the enhanced compensation payments between compensation for labor
performed and expense reimbursement?
(3) If so, was the amount paid for expense
reimbursement sufficient to fully reimburse the employees for the automobile
expenses they reasonably and necessarily incurred?
Reading between these lines, the three questions appear calculated to point out the “commonality” of the outside sales employees’ claims, and encourage the trial court to certify the class action. Although the trial court has not yet ruled on this issue, it appears likely that Harte-Hanks will be forced to defend its mileage reimbursement practices in the context of a class action.
Practical Tips
As mentioned above, Gattuso does not
represent a significant change in
Employers are advised to review their existing reimbursement policies with legal counsel or experienced HR professionals. Any employer that currently uses a method other than payment of the IRS mileage rate to reimburse employees for vehicle expenses should consult with legal counsel to ensure employees are being reimbursed for all actual costs associated with performing their job duties.