• California Supreme Court Gives the Green Light for Employers to Provide Lump Sum Reimbursements for Business-Relate
  • November 19, 2007
  • Law Firm: Bingham McCutchen LLP - Boston Office
  • In a long awaited decision, the California Supreme Court has answered the question that yes, an employer may satisfy its statutory business expense reimbursement obligation by paying employees enhanced compensation in the form of increases in base salary or commission rates provided certain conditions are met.

    Facts

    The decision came in Gattuso v. Harte-Hanks Shoppers, Inc., __ Cal. 4th __, 2007 DJDAR 16553 (Nov. 5, 2007) , where two outside sales representatives brought a class action lawsuit on behalf of themselves and other outside sales representatives against their employer Harte-Hanks Shoppers, Inc. (“Harte-Hanks”), a California corporation in the advertising industry. Plaintiffs sought reimbursement for automobile mileage expenses incurred in the course of their outside sales activities. Harte-Hanks took the position that it had fully satisfied its obligations to compensate outside sales representatives for automobile expenses by paying them higher base salaries and higher commission rates than it paid to its inside sales representatives, who contacted customers by telephone and did not travel. The outside sales representatives who drove their own automobiles to meet customers in person at their places of business were not separately reimbursed for travel expenses, but while Harte-Hanks compensated all sales representatives inside and out by commissions on advertising sales or by a combination of base salary and commissions, the outside sales representatives uniformly received a higher base salary and commission structure.

    Under California Labor Code Section 2802(a), employers are required to reimburse employees for expenses necessarily incurred in the discharge of their duties. The trial court issued an order stating that Section 2802 did not prevent employers from paying employees increased wages or commissions as compensation for business-related expenses, and it found that employers and employees could determine, by agreement, the amount of reimbursement, or, in the absence of an agreement, reimbursement could be any reasonable rate. Plaintiffs appealed and the Court of Appeals affirmed the trial court’s decision. Plaintiffs then sought review by the California Supreme Court.

    The California Supreme Court’s Decision

    The California Supreme Court concluded that an employer may satisfy its statutory reimbursement obligation by paying employees enhanced compensation in the form of increases in base salary or increases in commission rates, or both, provided there is a means or method to apportion the enhanced compensation to determine what amount is being paid for labor performed and what amount is reimbursement for business expenses. In addition, the enhanced compensation that is intended as expense reimbursement must also fully reimburse the employees for all expenses actually and necessarily incurred.

    In other words, the payment of enhanced compensation as reimbursement for business-related expenses does not relieve employers from fully compensating employees for those expenses and does not preclude employees from challenging the sufficiency of the payments. The California Supreme Court cautioned that employers who chose to reimburse employees for business-related expenses through increased wages should consider the tax consequences of utilizing this method.

    Significance for Employers

    California employers now have some options in the method of reimbursing employees for expenses they necessarily incur in the discharge of their duties. With respect to automobile expense reimbursement, employers have typically reimbursed employees under the actual expense method (an accurate but burdensome manner of determining the actual expenses using an employee’s personal automobile for business purposes by factoring in fuel, maintenance, repairs, insurance, registration, depreciation, etc.) or the mileage reimbursement method (the employer multiplies the total number of work-required miles driven by a predetermined amount that approximates the per-mile cost of owning and operating an automobile). The lump sum method whereby the employer merely pays a fixed amount for automobile expense reimbursement is now a third viable alternative with the blessing of the California Supreme Court, provided that the enhanced compensation in the form of increases in base salary or commission rates that is intended as expense reimbursement is so identified and sufficient to provide full reimbursement for actual expenses necessarily incurred.