The California Supreme Court Upholds a Variance on the Lump-Sum Mileage Reimbursement Method

On November 5, 2007, the California Supreme Court upheld a variance on the lump-sum mileage reimbursement method employed by a magazine with respect to its outside salespersons. In Gattuso v. Harte-Hanks Shoppers, Inc., the employer paid higher commission rates and base salaries to its outside salespersons who used their own vehicles in lieu of requiring these employees to submit mileage expense reports. The Court held that an employer can satisfy Labor Code section 2802, which requires that employees be reimbursed for all reasonable and necessary businesses expenses incurred in the course of their employment, by using this method as long as the increased wages or commissions are clearly apportioned on the employee's pay-stub in order to satisfy the mandates of Labor Code section 226. Although this method allows employers some flexibility in the manner in which employees are reimbursed for mileage expenses, the employer must “apportion the enhanced compensation to [show] what amount is being paid for labor performed and what amount is reimbursement.”

The Court also discussed various other acceptable methods of providing mileage reimbursements to employees. The “actual expense method” is often an undesirable option because it requires the employee and the employer to determine the actual cost of driving the particular car used by the employee, from gas to maintenance to insurance. Another method and probably the most common one used by employers is the “mileage reimbursement method.” The method requires employees to submit mileage expense reports in order to obtain a reasonable amount of reimbursement. The DLSE accepts the IRS mileage reimbursement rate as reasonable, although employees must be provided the opportunity to challenge the rate as applied to them. If an employee proves their expenses are higher than the IRS rate and reasonable, the employer must make up the difference. If the employer pays less than the IRS rate, then it bears the burden of showing that the rate used is reasonable. Alternatively, the employer and employee may agree to the rate of reimbursement. Once again, the employee must be given the chance to challenge any reimbursement received to the extent that it does not cover the employee's actual, reasonable expenses. Similar to the method used by the magazine in Gattuso, an employer may also use a “lump-sum payment” wherein the employer pays a fixed amount for automobile expense reimbursement without the employee submitting any information to the employer about work-required miles driven or automobile expenses incurred. This method is allowed provided that the amount paid is sufficient to provide full reimbursement for actual expenses necessarily incurred. As with all of the other methods, excepting the actual expense method, the employee must be permitted to challenge the amount of a lump-sum payment as being insufficient.

Although employers now have increased flexibility in how they reimburse their employees under Labor Code section 2802, they must approach each of these methods with caution toward ensuring compliance with the requirements set forth by the Court as to record-keeping and challenges to reimbursement amounts. Ultimately, an employer must ensure that its employees are fully reimbursed for all reasonable and necessary costs incurred during their employment. Employers are required to track the amount paid to employees for reimbursement as a separate item on the employees itemized wage statement, and they must provide a method for employees to challenge the reimbursement paid at any given time as being insufficient.

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Please note that the information contained in this newsletter is not intended to provide specific legal advice. You should consult with an attorney and not rely on any information contained herein regarding your specific situation.