CALIFORNIA SUPREME COURT RULES THAT EMPLOYERS CAN REIMBURSE BUSINESS EXPENSES BY PAYING INCREASED WAGES OR COMMISSIONS

On November 5, 2007, the California Supreme Court decided Gattuso v. Harte-Hanks Shoppers, Inc., ruling that employers can satisfy their duty to indemnify employees for all necessary business expenses under Labor Code Section 2802 by paying increased wages or commissions, rather than by separately reimbursing actual expenses.

Background:

Gattuso, a sales representative who used his personal vehicle for his job, filed a class action complaint against Harte-Hanks seeking reimbursement for automobile expenses. Harte-Hanks paid its sales representatives by salary and commission, but did not separately reimburse their automobile expenses. The trial court found that Labor Code Section 2802 permits employers to pay an increased salary and/or commission rather than a separate reimbursement for business expenses. The Court of Appeal affirmed and Gattuso appealed.

The Supreme Court Decision:

The Supreme Court noted that employers can lawfully reimburse employees’ business expenses in several different ways. First, employers can pay employees for their actual expenses. Employers can also reimburse automobile expenses based on mileage, but this method can only be used for automobile expenses, not for other business expenses such as lodging and meals. Finally, employers can reimburse business expenses in a lump sum payment, provided that the amount is sufficient to constitute full reimbursement. Because a lump sum payment is permissible, reimbursement for business expenses in the form of an increased salary or commission is also permissible. Thus, employers can combine wages and business expense reimbursements. However, the employer must communicate its method for doing so to the employees so that they can readily determine whether the employer has met its reimbursement obligations under the law.

What does this mean for employers?

At first glance, this decision looks like good news for employers. However, utilizing an increased salary and/or commission to reimburse employees for their business expenses may be more complicated than simply having employees turn in expense reports and reimbursing them for their actual expenses.

First, whatever method of reimbursement the employer chooses to use must be communicated to employees, and the “reimbursement” must be sufficient to cover all necessary business expenses. Employees must be permitted to challenge the payment, and if an employee shows that the increase in wages or commission is less than the amount of his/her actual expenses, the employer must make up the difference. This is the case, even if the employee agrees to the method of reimbursement up front. In addition, an employer that provides expense reimbursement in the form of an increased commission rate on sales runs a risk that the employee may earn less commission than anticipated. In such circumstances, the increased commission will not provide full reimbursement, and the employer will be required to make up the difference. Finally, opting to reimburse business expenses through an increased salary or commission will have tax consequences for both the employer and the employees. Accordingly, before implementing such a policy, tax counsel should be consulted.

While the Gattuso decision clarifies that employers can pay an increased salary and/or commission to cover business expenses, it may not be advisable to do so.