California Supreme Court clarifies employers' expense reimbursement duties
February, 2008
California law requires employers to reimburse employees for expenses necessarily incurred in the course of their job duties – but the law does not specify how employers may do so. In a recent case, Gattuso v. Harte-Hanks Shoppers, Inc., the California Supreme Court confirmed that employers have a reasonable amount of flexibility in accounting for and making expense reimbursements to employees.
Facts of Gattuso
Frank Gattuso was an outside sales representative for Harte-Hanks, the distributor of advertising leaflets, such as PennySaver and California Shopper. Outside sales reps were responsible for visiting customers and prospects at the customers' place of business, using their own automobiles. None of the outside sales reps received separate reimbursement of automobile expenses incurred on the job. However, the outside sales reps received higher salary and commission rates than inside salespersons. Harte-Hanks asserted the higher salary and commission rates were intended to, and did, cover the automobile expenses incurred by Gattuso and the other outside sales reps.
Gattuso filed a class action suit against Harte-Hanks, seeking additional reimbursement of expenses.
The Court's Ruling
The Supreme Court unanimously rejected Gattuso's argument, and held that Harte-Hanks' increased compensation arrangement presumptively complied with the law. The Court noted there were several different methods, each involving varying degrees of accuracy and administrative burden, to account for and reimburse mileage and similar expenses – including specific accounting for actual expenses like gas, insurance, depreciation, etc.; a "per-mile" reimbursement rate; or a lump-sum or per diem allowance. The Court also pointed out that the law permits an employer and employee to agree on the applicable method of reimbursement, so long as the agreement did not waive any rights by the employee to reimbursement of actual expenses incurred.
The Court did put some limits on the use of alternative reimbursement methods – i.e., anything other than the "actual expense" method. First, an employee must be able to challenge any method to the extent it does not properly cover the employee's actual expenses. Second, the employer must make clear what payments to the employee are for wages, and what are for expenses – particularly where both are included in an "enhanced compensation" scheme like Harte-Hanks'.
What Gattuso Means For Your Business
Gattuso gives employers a significant amount of flexibility in expense reimbursements. After Gattuso, properly drafted and enforced per diem, allowance, or other approximated reimbursement methods should be largely immune from legal challenge.
Employers should be cautious, however, when implementing an alternative method of expense reimbursement. As the Gattuso Court pointed out, there may be tax consequences to some alternative methods that render them insufficient to cover the employee's actual expenses – and thus subject to successful challenge by the employee.
Contact your Bullivant employment attorney for more information about this case, or for assistance reviewing your policies and procedures to ensure legal compliance.