The California Supreme Court Cautiously Approves "Lump Sum" Expense Reimbursement Method Under Labor Code Section 2802

The California Supreme Court Cautiously Approves “Lump Sum” Expense
Reimbursement Method Under Labor Code Section 2802

Introduction
California Labor Code section 2802 requires an employer to indemnify its employees for
reasonable expenses incurred in the course and scope of employment. Section 2802 was
designed to prevent employers from passing on their operating expenses to employees. For
example, an employer requiring an employee to travel on company business must reimburse the
employee for the reasonable travel costs incurred. This reimbursement obligation also includes
an employee’s reasonable expenses in driving a personal vehicle within the course and scope of
employment.
The California Supreme Court recently addressed an employer’s ability to satisfy Section
2802’s employee reimbursement requirements in Gattuso v. Harte-Hanks Shoppers, Inc. (Case
No. S139555, November 5, 2007). The Court’s unanimous ruling concluded that in addition to
the Division of Labor Standards and Enforcement (“Labor Commissioner”) sanctioned “actual
expense” and “IRS mileage rate” methods of reimbursement, an employer may also satisfy its
statutory reimbursement obligation by paying employees enhanced compensation in the form of
increases in base salary and/or increases in commission rates – termed the “lump sum”
reimbursement method. The Court’s decision is important because it basically overruled the
Labor Commissioner’s previous interpretations that the “lump sum” reimbursement method did
not satisfy the requirements of Section 2802.
Underlying Facts in Gattuso
Defendant Harte-Hanks Shoppers Inc. (“Harte-Hanks”) is a publishing company that
prepares and distributes advertising booklets and leaflets including the Pennysaver and
California Shopper publications. The company employs both inside and outside sales
representatives. The inside sales representatives conduct their business by telephone at the office
while the outside sales representatives travel outside of the office in their personal vehicles to
contact customers. Both groups of employees were paid by commission or a combination of
base salary and commission. The company generally did not reimburse the outside sales
representatives for their automobile expenses but instead paid them a higher compensation rate
than inside sales representatives with this extra amount intended as a “lump sum” reimbursement
for the travel costs.
Plaintiff Frank Gattuso is an outside sales representative in Harte-Hanks’ Southern
California unit. He and another outside sales representative filed a class action lawsuit against
Harte-Hanks on behalf of other outside sales representatives, seeking indemnification under
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Labor Code section 2802 for personal vehicle expenses. They based this argument, in part, on
the Labor Commissioner’s disapproval of the “lump sum” reimbursement method Harte-Hanks
used to reimburse outside sales representatives.
The trial court denied class certification and ruled that in contrast to the Labor
Commissioner’s interpretation, Section 2802 did in fact permit a “lump sum” reimbursement.
The Plaintiffs appealed this decision to the California Court of Appeal, which affirmed the trial
court’s decision. This led the Plaintiffs to appeal to the California Supreme Court.
California Supreme Court’s Interpretation of Section 2802 and Cautious Approval
of “Lump Sum” Method
In an interesting move, the Court reversed the Court of Appeal’s decision but upheld the
“lump sum” method of reimbursement under a different analysis. In contrast to the Labor
Commissioner’s previous interpretations, the Court noted that the “lump sum” method can
satisfy Section 2802’s reimbursement requirements. As a result, the Court ruled that an
employer can generally satisfy its obligation to reimburse an employee for vehicle expenses
through one of the following methods:
(1) “Actual Expenses” Method: An employer reimburses an employee for the exact
costs of operating the vehicle (fuel, maintenance, repairs, insurance, registration, and
depreciation). The Court noted that this is the most accurate method, but also the least
used method because of the burden in determining what expenses are the result of an
employee’s use of a personal vehicle at work.
(2) “IRS Mileage Rate” Method: An employer reimburses an employee at the current
mileage reimbursement rate adopted by the U.S. Internal Revenue Service (“IRS”) for
each mile driven in a personal vehicle within the course and scope of employment. The
current 2007 rate is 48.5 cents per mile. The Court noted that this is the least accurate
method, but also the most relied upon by employers based on the Labor Commissioner’s
general recommendation of this method.
(3) “Lump Sum” Method: An employer pays a lump sum to an employee in addition to
their standard wages as an approximation of reimbursed expenses incurred by the
employee. The employer must also incorporate a method to apportion and distinguish
between compensation paid for labor performed and that amount paid as reimbursement
for business expenses. Furthermore, an employer choosing to reimburse its employees
under this method must communicate the basis for apportioning any increases in
compensation between compensation for labor performed and business expense
reimbursement and separately identify the payments according to the documentation
requirements of Labor Code section 226.
However, the Court noted that an employer’s use of the “IRS Mileage Rate” or “Lump
Sum” methods to satisfy Section 2802 could be challenged by an employee who establishes that
such methods do not fully cover the actual reasonable vehicle expenses incurred in the course
and scope of employment. An employee who claims that the reimbursement rate does not
provide full compensation for vehicle expenses incurred has the burden of proving that his or her
actual reasonable expenses exceed the amount provided through these methods. Overcoming the
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presumptive reasonableness of these methods is not easy as it requires the employee to present
detailed and accurate records of amounts actually spent for fuel, maintenance, repairs, insurance,
registration, and depreciation. The employee will also need to establish that the expenses
occurred were “necessary”.
LCW Advice on Reimbursements Following Gattuso
Gattuso v. Harte-Hanks Shoppers began as a class action lawsuit of current or former
outside sales representatives seeking unpaid vehicle reimbursement payments over a four year
period along with court costs and attorneys’ fees. California has seen a large number of similar
class action lawsuits file on behalf of groups of employees claiming an employer violated state
and federal wage and hour laws. The penalties and damages from such class action lawsuits can
quickly establish liability in the thousands, if not millions of dollars.
Therefore, employers should review their existing policies and practices concerning
reimbursement of employee business expenses to verify that the current method of doing
business satisfies California law and does not create liability based upon Labor Code section
2802.
Even with the Court’s limited approval of the “Lump Sum” method, LCW still
recommends that employers use the “IRS Mileage Rate” method for reimbursing employees for
vehicle expenses. The “IRS Mileage Rate” method avoids the issue of distinguishing wages
from reimbursement payments as part of an employee’s overall compensation and creates a less
burdensome way to track employee vehicle expenses through miles driven in the course and
scope of employment. While the Gattuso case makes it clear that the “IRS Mileage Rate”
method is not necessarily presumptive under Section 2802, it also sets a high bar for employees
to establish that such reimbursement methods do not fully cover vehicle expenses incurred in the
course and scope of employment.
This article was written by Jeffrey R. Freedman and Gage C. Dungy, attorneys with the
labor and employment law firm of Liebert Cassidy Whitmore (LCW). Mr. Freedman is a Partner
in the Los Angeles office and can be reached at (310) 981-2000 or jfreedman@lcwlegal.com.
Mr. Dungy is an Associate in the Fresno office and can be reached at (559) 256-7800 or at
gdungy@lcwlegal.com For more information regarding the information above or our firm please
visit our website at www.lcwlegal.com, or contact one of our offices below.
Liebert Cassidy Whitmore publishes this article as a service to our clients and other friends for
informational purposes only. It is not intended to be used as a substitute for specific legal advice
or opinions and the transmission of this information is not intended to create an attorney-client
relationship between sender and receiver. You should not act upon this information without
seeking professional counsel.

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