California Supreme Court Endorses 'Lump Sum,' Increased Compensation Method For Employee Reimbursements

In Gattuso v. Harte-Hanks Shoppers, Inc., Case No. S139555 (Nov. 5, 2007), the Supreme Court of California held that employers may reimburse employees for business-related expenses pursuant to Labor Code section 2802 by paying them increased compensation, but cautioned that employers must apportion between compensation for work performed and reimbursement for business-related expenses.

Facts and Background

The employer in Gattuso, Harte-Hanks Shoppers, Inc., is a California corporation that prepares and distributes advertising booklets, including the PennySaver, and employs both inside and outside sales representatives. Outside sales representatives travel to customer locations using their own personal vehicles, and inside sales representatives primarily work at designated employer-owned locations utilizing employer-owned equipment. Harte-Hanks compensates both inside and outside sales representatives with commissions on advertising sales or a combination of base salary and commissions. With respect to the outside sales representatives, Harte-Hanks reimburses the employees for business-related travel expenses by paying increased commissions or higher base salary than the inside sales representative. The plaintiffs, a current outside sales representative and a former outside sales representative, on behalf of themselves and other Harte-Hanks outside sales representatives, brought a putative class action seeking indemnification under California Labor Code section 2802 ("Section 2802") for expenses incurred while using their personal vehicles for work. Section 2802, subdivision (a) provides: "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 [employment] duties ...." Subdivision (c) of Section 2802 defines "necessary expenditures or losses" to include "all reasonable costs." Harte-Hanks argued that payment of increased compensation to the outside sales representatives complied with Section 2802. The plaintiffs argued that Section 2802 requires employers to use a "correlated" business expense reimbursement method, - i.e., employers must reimburse employees for their actual business expenses on a dollar-for-dollar basis.

California Supreme Court's Analysis

The Supreme Court identified several valid methods an employer may use to reimburse its employees for business expenses. The "actual expense" method requires employees to...