In Gattuso v. Harte-Hanks, the California Supreme Court shed some light on the relatively unexamined issue by the courts of expense reimbursement. At issue in the case was whether Harte-Hanks could reimburse its outside sales force for mileage by paying a higher “lump sum” in the form of wages and/or commissions, as opposed to paying a specified sum for each mile driven. The Supreme Court ultimately held that employers may reimburse employees under the lump sum method, but also provided an excellent examination of:
- Employer's obligations under alternative methods of reimbursing employees for expenses,
- Who bears the burden of proof when challenging the reimbursement amount (short answer: the employee - as explained below),
- Whether employers and employees can independently negotiate an expense reimbursement amount (short answer: yes, and this amount does not have to be the IRS mileage rate), and
- What a court needs to consider in determining whether expenses incurred by the employee were “reasonable” and, therefore, reimbursable (short answer: this is a individualized analysis for each employee).
1. Reimbursement Method One: Actual Expense Method
The Court first examined the actual expense method that employers can utilized in reimbursing employees for business costs. The Court held that the actual expense method is the most accurate, but it is also the most burdensome for both the employer and the employee. The actual expenses of using an employee’s personal automobile for business purposes include: fuel, maintenance, repairs, insurance, registration, and depreciation.
To calculate the reimbursement amount using the actual expense method the employee must keep detailed and accurate records of amounts spent in each of these categories. Calculation of depreciation will require information about the automobile’s purchase price and resale value (or lease costs). In addition, the employee must keep records of the information needed to apportion those expenses between business and personal use. This is generally done by recording the miles driven for business and personal use. Then the employee submits this information for the employer to calculate the reimbursement due.
2. Method Two: Mileage Reimbursement Method
The Court recognized that employers may simplify calculating the amount owed to an employee by paying an amount based on a “total mileage driven." The Court recognized that the mileage rate agreed to between the employer and employee is “merely an approximation of actual expenses” and is less accurate than the actual expense method. Therefore, the employee may challenge the amount of reimbursement. However, if the employee challenges the amount reimbursed, the employee bears the burden to show how the “amount that the employer has paid is less than the actual expenses that the employee has necessarily incurred for work-required automobile use (as calculated using the actual expense method), the employer must make up the difference.”
Therefore, the employee must prove his case by producing the records of: fuel, maintenance, repairs, and depreciation, among other items as discussed above under the actual expense method. This analysis involves what the employee actually spends, and whether the expenses were “reasonable." This is a very difficult hurdle to overcome as the records required to meet the burden of proof under Gattuso need to be very detailed. In addition, the Court all but said that in determining what is “reasonable” requires an individualized review by the judge, which supports the argument that these types of cases are not appropriate for class-wide treatment.
The Court also held that the reimbursement rate can be negotiated by parties as long as it fully reimburses the employee, and the amount does not have to be set at the IRS mileage rate, which is contrary to the DLSE’s opinion (I guess depending on which opinion letter you read). The Court stated:
We agree that, as with other terms and conditions of employment, a mileage rate for automobile expense reimbursement may be a subject of negotiation and agreement between employer and employee. Under section 2804, however, any agreement made by the employee is null and void insofar as it waives the employee’s rights to full expense reimbursement under section 2802.
3. Method Three: Lump Sum Payment
Under this method, the employee need not submit any information to the employer about work-required miles driven or automobile expenses incurred. The employer merely pays a fixed amount for automobile expense reimbursement. The Court stated that these type of lump sum payments are often labeled per diems, car allowances, and gas stipends.
In permitting lump sum expense reimbursement payments, the Court held:
We agree with Harte-Hanks, and also with the trial court and the Court of Appeal, that section 2802 does not prohibit an employer’s use of a lump-sum method to reimburse employees for work-required automobile expenses, provided that the amount paid is sufficient to provide full reimbursement for actual expenses necessarily incurred.
The Court made it clear that employers paying a lump sum amount, however, have the extra burden to separately identify the amounts that represent payment for labor performed and the amounts that represent reimbursement for business expenses.