Alert: California High Court Allows Employers To Reimburse Expenses By Lump Sum

November 14, 2007

On November 5, 2007 the California Supreme Court ruled that employers may reimburse employees for their business related expenses through a lump sum, or a general increased compensation package, that is not directly correlated to the employees' actual expenditures.  The highly anticipated ruling in Gattuso v. Harte-Hanks Shoppers, Inc. provides employers with greater flexibility in determining how they reimburse employee expenses in compliance with Labor Code § 2802.

Plaintiffs Frank Gattuso and Ernest Sigala were outside sales representatives for Harte-Hanks Shoppers, which prepares and distributes various advertising booklets such as the Penny Saver.  Gattuso would drive his automobile to meet with advertising customers.  Meanwhile, inside sales representatives contacted customers by phone.  Harte-Hanks paid outside sales representatives a higher base salary and commission percentage than it paid inside sales representatives.  The company does not separately reimburse outside representatives for their automobile expenses.

Plaintiffs sued Harte-Hanks alleging that failure to pay specifically for the auto expenses violated the duty to indemnify employees pursuant to California Labor Code § 2802.  Harte-Hanks countered that it paid outside sales representatives more than their inside sales colleagues in part to reimburse for automobile expenses, in satisfaction of Section 2802.   The trial court found that Harte-Hanks did not violate § 2802 and the Court of Appeal held that Harte-Hanks' intention to reimburse could be determined by a jury. 

The California Supreme Court held that Section 2802 requires only that the employer's reimbursement method result in a full reimbursement for actual expenses incurred by the employee.   The Court noted that some employers elect to reimburse expenses in a lump sum rather than tracking and reimbursing exactly the expenses paid.  The Court opined that such lump sum payment is acceptable as long as employees are allowed to seek greater reimbursement when actual expenses exceed the lump sum amount.  If the employee were not permitted to compare the employer's lump sum payment to the actual expenses he or she may have incurred, then the lump sum would preclude effective enforcement of the employee's rights under Section 2802.  

The Court further opined that an employer may combine wages and business expenses into a single enhanced payment, as had Harte-Hanks, so long as the employer adopts some method or formula which allows the employee (and government) to identify which portion is for wages and which portion is for expense reimbursement.  As long as the portion designated for expense reimbursement equals or exceeds actual expenses, Section 2802 is satisfied.

What this means for employers . . .        
Employers may use lump sum payments to indemnify employees for their business related expenses.  Employers may even combine the lump sum indemnification payment with the employee's normal salary.  This allows employers and employees to avoid the burdensome task of tracking all expenses that an employee incurs.  However, employers must provide employees with an opportunity to challenge the employer's lump sum method by comparing the amount paid to the actual expenses incurred for the period in question.  In addition, in order to ensure that the employer is complying with statutory wage requirements and indemnification requirements, the employee must be able to readily ascertain what amount of his pay constitutes compensation for his services, and what part of his pay constitutes indemnification for business related expenses.  Failure to provide either of these aspects could render the lump sum agreement void and would expose employers to liability under § 2802.