Alert: California Court Allows Employer To Incorporate Expense Reimbursement Into Base Salary

November 02, 2005

A California Court of Appeals has held that an employer may satisfy the expense reimbursement requirements of Labor Code § 2802 by increasing base salary or commissions by an amount that covers actual expenses incurred.  In Gattuso v. Harte-Hank Shoppers, Inc., 05 C.D.O.S. 9373 (Oct. 27, 2005), the court rejected a class action suit brought on behalf of outside salespersons of Harte-Hank Shoppers, Inc. (“Harte-Hank”), a marketing company which distributes advertising publications.  These employees sought indemnification under Section 2802 for expenses incurred in using their personal automobiles to perform their duties.  Under Section 2802, an employer is required to indemnify an employee “for all necessary expenditures or losses incurred by the employee in direct consequence of the discharge of his or her duties.” 

Harte-Hank employed both inside and outside salespeople.  The outside salespeople received no reimbursement for the use of personal cars, but earned $4-5 per hour more than the inside salespeople.  The employer claimed that the salary differential was partially intended to cover the auto expenses, though it had never tested to assure that the differential was sufficient and had not previously designated the payment as being in lieu of expense reimbursement.

The court found that anticipated expense reimbursement may be added into base salary as long as the added portion, after taxes, at least equaled actual expenses incurred.  The court rejected Plaintiff’s arguments that Section 2802 requires either (1) reimbursement for actual expenses incurred by the employee, or (2) payment of a reasonable per-mile rate.  The court found that the Section 2802 and the regulations promulgated thereunder do not specify any particular method by which the employer must indemnify employees for necessary business expenses or losses.  The court did not adjudicate whether Harte-Hank’s salary structure did in fact compensate employees for expenses – the court merely found that Section 2802 allowed expense reimbursement through salary enhancement.

Employers might consider whether incorporating expense reimbursement into base salary may ease administrative burdens.  Any employer who intends to do so, however, should preserve a record demonstrating that salary has been increased by an amount sufficient, after taxes, to match historical expenses.  Of course, this post-tax comparison may result in larger payments to employees than untaxed reimbursement for specific expenses actually incurred.  Nevertheless, some employers may find such salary enhancements preferable to processing and verifying individual expense reports.

For more information about this or other employment-related matters, please contact a member of the firm’s Employment Practice Group.