On November 5, 2007, the California Supreme Court in Gatusso v. Harte-Hanks Shoppers Inc. (SC139555), issued an opinion stating that employers may rely upon increased compensation or commission plans to satisfy employee reimbursement obligations. Under California Law, in particular, Labor Code section 2802(a), an employer is required to indemnify its employees for all necessary expenditures or losses incurred by the employee in direct consequence of the discharge of their duties, and for all such expenditures incurred by employees at the direction of the employer.

In Gatusso, the California Supreme Court held that an employer may satisfy the requirements of Labor Code section 2802(a) by paying employees enhanced compensation, such as increased base salary and/or commissions, rather than separately reimbursing employees for business expenses and expenditures. However, to demonstrate compliance with California law, employers utilizing such plans must be able to clearly establish and differentiate the amount being paid to employees for performance of their job duties and the amount being paid for reimbursement of business expenses.

In other words, an employer can pay its employees enhanced compensation in the form of a per diem amount to cover expenses, and does not have to pay its employees dollar for dollar and separately reimburse them for actual expenses. This decision is favorable to employers because it enables them to be more flexible in how they handle and administer their expense reimbursements.

The Gatusso opinion does not, however, relieve an employer of the obligation under section 2802(a) to fully reimburse employees for necessary expenditures. Therefore, if the amount paid by the employer in enhanced compensation does not adequately cover the employees' actual expenses, the employer may still be liable for the difference.

The Gatusso decision is the first time in which a per diem method of payment or increased commission has been found to comply with the provisions of Labor Code section 2802(a).