|
 | |
|
California Supreme Court OKs Alternative Employee Expense Reimbursement Plans
|
|
January 7, 2008
|
|
|
|
Thelen Reid Brown Raysman & Steiner LLP
Expense reimbursement continues to be a hot topic in California wage-and-hour law. The California Supreme Court has held in that employers may offer employees lump-sum reimbursement for work-related expenses, even "in the form of increases in base salary or... in commission rates."
Employers may do so as long as: 1) "[T]he employer establishes some means to identify the portion of overall compensation that is intended as expense reimbursement"; and 2) "the amounts so identified are sufficient to fully reimburse the employees for all expenses actually and necessarily incurred." Employers have maximum flexibility to select convenient means of satisfying their obligation under California Labor Code §2802 to reimburse employees for all "necessary" and "reasonable" expenses "incurred... in the... discharge of his or her duties." 1/
The decision came in an appeal from denial of class certification of a claim that Harte-Hanks failed to reimburse commissioned salespersons for use of their personal cars during work. Harte-Hanks is the publisher of the "PennySaver" and "California Shopper" advertising circulars. It employs two types of commissioned salespersons to sell advertising in its circulars: Inside sales representatives, who sell over the phone from Harte-Hanks' office, and outside representatives, who travel a defined territory calling on advertisers in person. Outside sales representatives receive a higher commission rate than their counterparts, but also supply their own car for work travel and, with a few exceptions, do not collect any other reimbursement for their car expenses.
Plaintiffs filed a class action lawsuit challenging the Harte-Hanks policy, contending that §2802 can only be satisfied by dollar-for-dollar reimbursement of car expenses or mileage-based reimbursement at the rate approved by the Internal Revenue Service for tax purposes. The trial court disagreed, holding that an agreed-upon lump sum can satisfy the requirements of §2802. It then denied class certification because whether the lump-sum reimbursement received by each class member reasonably reimbursed him or her for expenses required a case-by-case inquiry. The Court of Appeal affirmed.
The Supreme Court agreed in large part with the analysis of the lower courts but made minor modifications and remanded for reconsideration of class certification in light of its ruling. Gattuso v. Harte-Hanks Shoppers, Inc., 42 Cal.4th 554, 67 Cal.Rptr.3d 468 (2007).
The Supreme Court's analysis focused on the distinction between two methods of expense reimbursement: The "actual expense method," which involves a dollar-for-dollar reimbursement of expenses, and the "lump sum" method, in which the parties agree in advance to an amount that is intended to substitute for dollar-for-dollar reimbursement. Because §2802 obliges an employer to reimburse only for "necessary" expenses, "which in turn depends on the reasonableness of the employee's choices," the actual expense method "is the most accurate, but... also the most burdensome for both the employee and the employer." The lump sum method, in contrast, is less accurate but also is less burdensome for all parties. 2/
The court concluded that neither the plain meaning of §2802, its legislative history, case law nor interpretation by the Division of Labor Standards Enforcement barred the use of lump-sum reimbursement methods. However, noting that because Labor Code §2804 barred waiver of rights protected in §2802, "the existence of an agreement between an employer or employee regarding a lump-sum reimbursement payment would not relieve the employer of the statutory obligation to pay full reimbursement, nor would it bar an employee challenge to a lump-sum payment as being insufficient under section 2802 to provide full reimbursement."
Furthermore, the court drew a distinction between "wages" and "expense reimbursement." Wages, in accord with Labor Code §200, are paid to employees "for labor performed" and are "subject to different statutory and sometimes also contractual constraints" than expense reimbursement. Accordingly, the court held that "an employer may not combine the payments for both in a way that would seriously hamper or effectively preclude enforcement of the various statutory and contractual obligations." In particular, an "employer must provide some method or formula to identify the amount of the combined employee compensation payment that is intended to provide expense reimbursement." Providing such a means of "apportionment... is a practical necessity for effective enforcement of" §2802 and "is implicit in the statutory scheme."
To satisfy this obligation in the future, the court held that employers utilizing lump-sum reimbursement plans "through increases in base salary or commission rates, should, in providing the documentation required by section 226, subdivision (a), separately identify the amounts that represent payment for labor performed and the amounts that represent reimbursement for business expenses."
Employers with existing lump-sum reimbursement plans should consider some or all of the following compliance measures:
|  | Manuals, handbooks and other relevant documentation should clearly reflect the nature of the lump-sum plan, its terms and the categories of expenses it covers.
|
| | If the lump sum is in the form of an increase in wage rates, salary, commissions or other forms of compensation, the portion attributable to reimbursement should be clearly identified so that employees separate wages from reimbursement funds.
|
| | Internal mechanisms should be established for seeking additional reimbursement when the lump sum does not adequately cover all reasonably-incurred expenses.
|
If you would like to receive legal reports and updates more quickly, by e-mail, click here and fill out the mailing list form.
For more information about the issues covered in this report, please contact Linda S. Husar in our Los Angeles office at 213-576-8017 or at lshusar@thelen.com or contact your Thelen attorney. For more information about Thelen's Construction and Government Contracts Department, click here.
ENDNOTES
| 1/ | Section 2802 provides in relevant part:
|
| (a) | An employer shall indemnify his or her employee for all necessary expenditures or losses incurred by the employee in direct consequence of the discharge of his or her duties, or of his or her obedience to the directions of the employer, even though unlawful, unless the employee, at the time of obeying the directions, believed them to be unlawful....
|
| (b) | For purposes of this section, the term "necessary expenditures or losses" shall include all reasonable costs, including, but not limited to, attorney's fees incurred by the employee enforcing the rights granted by this section.
|
| 2/ | The court also considered a hybrid of the two methods, the commonly-used "mileage reimbursement method," and concluded that it, too, was acceptable so long as it satisfied the conditions imposed by the court on lump-sum reimbursement plans.
|
©2008 Thelen Reid Brown Raysman & Steiner LLP
|
|
| |
