The California Supreme Court recently held that an employer may reimburse employees for work-related expenses by increasing their salary or commissions. In Gattuso v. Harte-Hanks Shoppers, Inc., current and former outside sales reps of Harte-Hanks Shoppers claimed the company failed to reimburse them for work-related vehicle expenses. In response, Harte-Hanks cited its practice of paying outside sales reps higher base salaries and higher commission rates than its inside sales reps, with the increase intended to account for the expenses.

The Supreme Court affirmed the rulings of two lower courts, which found that Harte-Hanks' practice was lawful, and specifically held that the obligation to reimburse employees for work-related expenses may be fulfilled through increased compensation (salaries and/or commissions) rather than through separate reimbursement for the actual expenses. The lawfulness of this reimbursement option is contingent on the following:

  • Employees must be able to challenge the sufficiency of the payment to cover actual expenses;
  • Employers must communicate to affected employees a method or formula that identifies the portion of the payment attributable to the reimbursement; and
  • Employers must make up the difference, if any, between the reimbursement payment and the employee's actual expenses.

Further, the Supreme Court suggested (without specifically requiring) that employers separately identify (e.g., on a pay stub) the amounts attributable to labor performed and expense reimbursement.

Employers who opt to use increased compensation to meet their expense reimbursement obligations must comply with these requirements and document their compliance.