The California Supreme Court in Gattuso v. Harte-Hanks
Shoppers, Inc. recently addressed 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 held that employers may reimburse employee
expenses in the form of "additional wages" payable in
a "lump sum" instead of reimbursing each separate
expense for the exact amount incurred, but only if 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.
At issue was Labor Code section 2802(a), which requires that
employers indemnify employees for expenses necessarily incurred
in the performance of their job duties. The employer,
Harte-Hanks, required its sales representatives to
drive their own automobiles on sales calls and compensated them
by either commissions on sales or a combination of salary plus
commissions. One of Harte-Hanks' sales
representatives filed the class action lawsuit, arguing that
this method of expense reimbursement was not allowable and that
the payments must be made separately from wages.
The employer responded that it satisfied its obligation to
reimburse representatives for expenses related to the use of
their own automobiles by paying them higher base salaries and
higher commission rates rather than directly reimbursing them
for their expenses.
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, and found that the "lump
sum" payment method was lawful. However, 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. The Court specified 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.
The consequences of the decision are as follows:
Full Reimbursement of Expenses is Still Required
Employers must reimburse their employees for all
out-of-pocket expenses the employees incur in carrying out
their duties. Since an employer and employee cannot agree to
waive this reimbursement requirement, the employer still must
make clear what portion of the salary or commission payments is
meant to reimburse the employee for expenses versus
compensation for the work performed.
If the amount meant to cover expenses is less than the
actual amount of expenses incurred during a pay period, the
employer must pay the employee additional money to make up the
The "Lump Sum" Method, Although Permissible, is
not a an Easy Option
The employer therefore must make certain that employees are
paid any additional money owed above and beyond the "lump
sum" payment. If the employees are no longer required to
submit expense reports, it will be difficult - (if not
impossible) for the employer to determine if it has fully
reimbursed the employee, and the only alternative will be to
pay a lump sum generous enough to cover any expenses. Employees
would most likely have a windfall in the form of extra wages if
they incur expenses totaling less than their "lump
Income Tax Implications
If an employer chooses the lump sum method of reimbursement,
it should make sure that the expense reimbursement portion is
not taxed as "wages." To do so, the employer must
follow very specific rules. The employer must verify that the
expenses are work-related (i.e., incurred in connection with
the employer's business), and that the employees are able
to substantiate the expenses. This means that the employer and
employee must still keep sufficient records to evidence the
nature of the expense even though the employee is reimbursed in
a lump sum. The employer should consult with its tax accountant
or attorney for details.
Although Gattuso v. Harte-Hanks clarified that the
"lump sum" payment method for expense reimbursement
is legal, use of this payment method mandates an extremely fact
intensive analysis, and raises potential problems for any
employer who errs in its calculations. One might conclude,
instead of creating a safe harbor, which was probably the
Court's goal, the decision may have inadvertently
scuttled the ship.
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general guide to the subject matter. Specialist advice should
be sought about your specific circumstances.
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Effective January 1, 2015, certain employers became subject to the employer mandate of the Patient Protection and Affordable Care Act, and thus subject to liability under the ACA Employer Shared Responsibility provisions.