California Labor Code section 2802 requires an employer to reimburse employees for all expenses which were necessarily incurred in the course of employment. While this is a relatively straight-forward statute, it may not always be easy to apply in business. The most common form of employee reimbursement is automobile costs. The California Supreme Court recently issued a ruling which gave employers some guidelines for the reimbursement of employee car expenses.
In Gattuso v. Harte-Hanks Shoppers, Inc., S139555, the employer sold and printed advertising space in booklets and leaflets, such as the Penny Saver. It employed inside salespersons and outside salespersons. The plaintiffs were salespersons who sued for all the automobile expenses they incurred in performing their duties. In fact, the plaintiffs not only wanted reimbursement of their expenses but also sought a class action to include all current and former employees.
The employer argued it satisfied its obligation because it paid the salespersons increased wages and commissions instead of preparing a separate check for the actual expenses. The employer argued this satisfied its obligations under the Labor Code to indemnify its employees for their costs.
The Supreme Court outlined three possible methods for paying for automobile expenses. The first method is the actual expense method. This is the most accurate but also the most burdensome. The employee must keep detailed and accurate records of the expenses such as fuel, maintenance, repairs, insurance, registration, and depreciation. The employee must then allocate how much of the automobile is used for personal use versus business use. The employer can then consider such things as the choice of car and its gas mileage to reach a figure of whether the amount of expense is “necessary.”
The second method is mileage reimbursement. This is where the employee keeps track of the number of miles driven in the course of his/her job duties. The employer then compensates the employee at a rate which approximates the cost per mile. The Supreme Court acknowledged IRS mileage rate is widely used in business. While the mileage reimbursement is less accurate, it would satisfy the reimbursement requirements if the IRS rate were used.
Another acceptable methodology is the lump-sum payment. This is when the employer pays a fixed amount for automobile expenses. It can be called a car allowance or a gas stipend, but it is based on the employee’s expected job duties and the typical number of miles driven. While this method can satisfy the Labor Code requirements, the Supreme Court cautions employers the lump-sum amount must be sufficient to provide full reimbursement.
The employer in Gattuso opted to link automobile reimbursement to increased commissions. The Supreme Court found this method was an acceptable form, provided it met certain minimum requirements.
First, the amount of increase must be enough to pay for the full reimbursement of expenses. If it is insufficient, then the employer is required to make up the difference.
Second, the employer must establish some means to identify the portion of the overall paycheck which represents the portion of reimbursement. This should be provided in a paycheck statement. The amount of reimbursement should be segregated to show how much of the paycheck is for wages and how much is for reimbursement.
Given these guidelines, what is the practical effect of the Gattuso case?
Employers need to be mindful of the job duties of each employee. Some employees may only use their car once or twice a month, while other employees are in their cars more than in the office. When faced with this situation, the employer should fully evaluate a benefit and burden analysis as to the methodology for reimbursing car expenses. The mileage reimbursement under the IRS guidelines is probably the simplest and most effective way of paying employees for the car costs when they occasionally use their car. For employees who make their living traveling, it may be more complicated.
The employers also need to understand the consequences of failing to reimburse employees for car expenses. While the actual damages to the named plaintiffs in Gattuso may have been a few thousand dollars, they sought to join all current and former employees as parties to the case. If successful, every salesperson who worked for the employer in the last three to four years would have been seeking damages. The totals could be in the millions of dollars.
There is one additional effect of the Gattuso decision. The Supreme Court outlined various options for businesses in the reimbursement of a common business expense, automobile mileage, as well as the type of proof necessary to defend these types of claims. If your company is sued for a failure to properly reimburse employees, the plaintiff’s attorney will ask for this information.
Employers should evaluate current employees as well as past employees to verify their ability to meet the burden of proof in Gattuso. Employers should evaluate past employment records and confirm they are complying with the law. If not, you should seek advice from an experienced employment law attorney to develop a plan to correct the problem before a lawsuit forces the issue.
This article appeared in the December 17, 2007, issue of the San Diego Business Journal
