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SUPREME COURT CLARIFIES EMPLOYEE EXPENSE REIMBURSEMENT RULES
The California Supreme Court just decided another important wage and hour case which clarifies an employer's obligations to reimburse employees for expenses. Gattuso v. Harte-Hank Shoppers, Inc. Under California law (Labor Code section 2802), an employer is required to reimburse employees for all necessary expenditures incurred in the performance of their job duties. This includes expenses associated with work-related travel when the employee uses a personal vehicle. The issue before the Court was whether an employer may satisfy the expense reimbursement obligation for employee auto expense reimbursement simply by paying the employee a flat sum as additional compensation (such as higher wages or commissions) rather than go through the hassle of doing an expense reimbursement.
The Supreme Court ruled that an employer may be able to satisfy its legal obligation to reimburse employees for such expenses by paying enhanced compensation in the form of increases in base salary or increases in commission rates, or both, provided there is a means or method to apportion the enhanced compensation to determine precisely what amount is being paid for labor and what amount is being paid for business expenses. Thus, the employer must clearly identify what portion of the employee's compensation is intended to cover the employee's expenses in the employment policy or offer letter that states how expenses are to be repaid. Second, and perhaps most important, the amount designated as the expense reimbursement must actually cover all expenses necessarily incurred by the employee.
In the case of automobile expenses, reimbursement at the IRS mileage rate creates a rebuttable presumption that the employee has been fully reimbursed for all automobile expenses. If the employee can establish the actual expenses are greater, the employer must pay the difference. Likewise, an employer can pay a lump sum car allowance, or increased salary or commissions to reimburse the employee for automobile expenses, so long as it covers the employee's actual expenses. Again, if the employee can establish the actual expenses are higher, the employer must pay the difference.
Like most court cases, the Supreme Court's decision still leaves a number of important questions unanswered. First, the decision specifically addressed reimbursement for automobile expenses, not other expenses incurred by employees. Thus, without the State Labor Commissioner weighing in on the subject, we do no know for sure whether the case can be read more broadly to cover all other employee expense reimbursements. There does not appear to be any logical reason to limit the case to just automobile expenses. Thus, an employer ought to be able to reimburse employees in a similar fashion for other business expenses by designating a portion of the employee's compensation as expense reimbursement. Again, the amount must be high enough to cover the employee's actual expenses.
Another important issue to consider is the tax consequences to the employer and the employee. In general, expense reimbursement is not taxable income to the employee. You should consult with your tax advisor about all of the tax implications. Also, there could be extra overtime pay due if the portion designated as expense reimbursement is more than the employee's actual expenses. In such cases, the additional payments could be considered "wages" that must be included in the employee's regular rate when calculating overtime.
For some employers, it may be simpler to stick with the old fashioned method of simply reimbursing employees off expense reimbursement requests rather than trying to come up with a one-size-fits-all amount. For those that feel it makes sense to do otherwise, the Supreme Court's decision is welcome news.
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Please call your Firm contact if you have any questions about this important decision.
For more information, call us today at (818) 508-3700, or visit us on the web, at www.brgslaw.com. Sincerely,Richard S. RosenbergPartnerBRG&S, LLP |
