California Labor Code Section 2802 provides that employers must reimburse employees for "reasonably incurred" business expenses. To this end, employees typically submit expense reports and are then reimbursed dollar for dollar. But what if an employer does not want to be bothered with a dollar for dollar reimbursement, and instead "ballparks" the usual costs and increases its workers' wages accordingly?

That is exactly the issue that was addressed this week by the California Supreme Court in Gattuso v. Harte-Hanks Shoppers. Harte-Hanks Shoppers, Inc. decided to pay certain employees a higher rate of pay to "cover" incurred business expenses rather than reimbursing expenses dollar for dollar. Specifically it paid its outside sales persons — who were expected to use their personal vehicles in the performance of their jobs — more per hour and gave them a higher rate of commission than it gave inside sales persons — who were not expected to use their personal vehicles. The company did not otherwise reimburse the outside sales persons for expenses related to the use of their cars. The outside sales persons filed suit alleging Harte-Hanks failed to indemnify them for all their business-related personal vehicle expenses. Harte-Hanks argued that the employees were de facto indemnified through their higher wage and commission rate.

The Second District Court of Appeal held that employers could indemnify employees for expenses under Labor Code Section 2802 through higher wages and commissions, but only if the increased amount, after taxes, was in fact sufficient to cover the expenses actually incurred.

The case was appealed and on November 5, 2007, the California Supreme Court agreed with the Court of Appeal's finding that employers may pay extra wages to employees to cover reimbursable expenses, so long as the expenses are accounted for, allowing the employee to determine whether he or she is receiving full reimbursement, and the taxing authorities to distinguish between reimbursed expenses and wages.

In essence, the court held that Section 2802 does not prohibit an employer's use of a lump-sum method to reimburse employees for work-related expenses, if (1) the amount paid is sufficient to actually fully reimburse employees for the expenses they necessarily incur, and (2) the reimbursement is accounted for separately from the employees' regular income.

Please contact any member of Schiff Hardin's Labor and Employment Group if you have questions about this decision or about California Labor Code Section 2802.