Expense reimbursement continues to be a hot topic in California wage and hour law1. On November 4, 2007, the California Supreme Court held in Gattuso v. Harte-Hanks Shoppers, Inc. that employers may offer employees lump-sum reimbursement for work-related expenses, even "in the form of increases in base salary or . . . in commission rates," so long as: (1) "[T]he employer establishes some means to identify the portion of overall compensation that is intended as expense reimbursement"; and (2) "the amounts so identified are sufficient to fully reimbursement the employee[] for all expenses actually and necessarily incurred." Slip Opn. at 1. Under Gattuso, employers maintain maximum flexibility to select convenient means of satisfying their obligation under California Labor Code § 2802 to reimburse employees for all "necessary" and "reasonable" expenses "incurred . . . in the . . . discharge of his or her duties."2

Gattusois an appeal from the denial of class certification of a claim that Harte-Hanks failed to reimburse commissioned salespersons for the use of their personal cars during work. Harte-Hanks is the publisher of the "PennySaver" and "California Shopper" advertising circulars. It employs two types of commissioned salespersons to sell advertising in its circulars: Inside sales representatives, who sell over-the-phone from Harte-Hanks’ office, and outside representatives who travel a defined territory calling on advertisers in persons. The outside sales representatives receive a higher commission rate than their counterparts, but also supply their own car for work travel and, with a few exceptions, do not collect any other reimbursement for their car expenses. See Slip Opn. at 2-3.

Plaintiffs filed a class action lawsuit challenging Harte-Hanks policy, contending that § 2802 can only be satisfied by dollar-for-dollar reimbursement of car expenses, or mileage-based reimbursement at the rate approved by the I.R.S. for tax purposes. The trial court disagreed, holding that an agreed-upon lump sum can satisfy the requirements of § 2802. It then denied class certification because whether the lump-sum reimbursement received by each class member reasonably reimbursed him or her for expenses required a case-by-case inquiry. The Court of Appeal affirmed. See Slip Opn. at 3-4.

The Supreme Court reversed, agreeing in large part with the analysis of the lower courts, but making minor modifications and remanding for reconsideration of class certification in light of its ruling.

The Court’s analysis focused on the distinction between two methods of expense reimbursement: The "actual expense method," which involves a dollar-for-dollar reimbursement of expenses, and the "lump sum" method, in which the parties agree in advance to an amount that is intended to substitute for dollar-for-dollar reimbursement. Because § 2802 obliges an employer to reimburse only for "necessary" expenses, "which in turn depends on the reasonableness of the employee’s choices," the actual expense method "is the most accurate, but . . . also the most burdensome for both the employee and the employer." Slip Opn. at 14-15. The lump sum method, in contrast, is less accurate, but also less burdensome for all parties.3

The Court concluded that neither the plain meaning of § 2802, nor its legislative history, construction in the case law, or interpretation by the Division of Labor Standards Enforcement, barred the use of lump-sum reimbursement methods. Slip Opn. at 5-13. However, noting that since Labor Code § 2804 barred waiver of rights protected in § 2802, "the existence of an agreement between an employer or employee regarding a lump-sum reimbursement payment would not relieve the employer of the statutory obligation to pay full reimbursement, nor would it bar an employee challenge to a lump-sum payment as being insufficient under section 2802 to provide full reimbursement." Slip Opn. at 19.

Furthermore, the Court drew a firm distinction between "wages" and "expense reimbursement." Wages, in accord with Labor Code § 200, are paid to employees "for labor performed," and are "subject to different statutory and sometimes also contractual constraints," and then expense reimbursement. Accordingly, the Court held that "an employer may not combine the payments for both in a way that would seriously hamper or effectively preclude enforcement of the various statutory and contractual obligations." In particular, an "employer must provide some method or formula to identify the amount of the combined employee compensation payment that is intended to provide expense reimbursement." Providing such a means of "apportionment . . . is a practical necessity for effective enforcement of" § 2802, and "is implicit in the statutory scheme." Slip Opn. at 20-22.

To satisfy this obligation "[i]in the future," the Court held that employers utilizing lump-sum reimbursement plans "through increases in base salary or commission rates, should, in providing the documentation required by section 226, subdivision (a), separately identify the amounts that represent payment for labor performed and the amounts that represent reimbursement for business expenses." Slip Opn. at 24 n.6.

We recommend that employers with existing lump-sum reimbursement plans consider the following compliance measures. Some (or all) of them may be appropriate to your circumstances:

  • Manuals, handbooks, and other relevant documentation should clearly reflect the nature of the lump-sum plan, its terms, and the categories of expenses it covers.
  • If the lump sum is in the form of an increase in wage rates, salary, commissions, or other forms of compensation, the portion of compensation attributable to reimbursement should be clearly identified so that employees separate wages from reimbursement funds.
  • Establishing internal mechanisms for seeking additional reimbursement where the lump sum does not adequately cover all reasonably-incurred expenses.

Click here to view a copy of the Supreme Court’s opinion in Gattuso.

Footnotes

1. Click here to view our previous Alert concerning proposed travel expense reimbursement regulations.

2. Section 2802 provides in relevant part:

"(a) An employer shall indemnify his or her employee for all necessary expenditures or losses incurred by the employee in direct consequence of the discharge of his or her duties, or of his or her obedience to the directions of the employer, even though unlawful, unless the employee, at the time of obeying the directions, believed them to be unlawful. . . .

"(c) For purposes of this section, the term ‘necessary expenditures or losses’ shall include all reasonable costs, including, but not limited to, attorney's fees incurred by the employee enforcing the rights granted by this section."

3. The Court also considered a hybrid of the two methods, the commonly-used "mileage reimbursement method," and concluded that it, too, was acceptable, so long as it satisfied the conditions imposed by the Court on lump-sum reimbursement plans. Slip Opn. at 16-17.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.