As most of you probably know, California law requires an employer to reimburse its employees for all necessary expenses incurred in discharging their duties. For example, if you require an employee to use her own car to perform her job, you must reimburse the employee for automobile expenses. Examples of other reimbursable expenses could include travel expenses, business cards, office equipment, certain employer-mandated training, or amounts spent on marketing efforts.
The California Supreme Court has recently decided that an employer may satisfy its expense reimbursement requirement by paying its employees increased compensation in the form of increased base salary or commission rates, or both. At issue in the case was the proper way to reimburse employees who are required to drive their own automobiles as part of their job duties. All sides agreed that California law requires employers to fully reimburse its employees for automobile expenses actually and necessarily incurred in performing their job duties. The issue raised by the case was what methods an employer may use for providing such reimbursement. The court found that there are three methods an employer may use to calculate the amount of reimbursement required. Although this case was limited to reimbursement for automobile expenses, it would apply to other expenses employees incur in performing their job duties.
The first reimbursement method is the actual expense method, which requires the employer to calculate the expenses that an employee actually and necessarily incurs. The actual expenses of using an automobile, for example, include gas, maintenance, repairs, insurance, registration, and depreciation. The actual expense method is the most accurate method, but it is also the most burdensome because it requires detailed recordkeeping by the employee of amounts spent in each of these categories, along with information needed to apportion those expenses between business and personal use. Moreover, because an employer is only required to reimburse an employee for necessary business expenses, the actual expense method requires an employer to consider the reasonableness of an employee’s choices. For example, an employee’s choice of automobile will significantly affect the expenses associated with using it, because it’s more expensive to drive a Lincoln Navigator than a Toyota Corolla. When calculating actual costs, the employer would need to decide which portion of these costs were necessary (and thus reimbursable), and which merely reflected employee preference for a more expensive car. Because this method can be so burdensome, most employers do not use it for reimbursement of automobile expenses. However, it is commonly, and easily, used for reimbursement of other expenses (such as air fare, meals, etc.).
The second method of calculating reimbursement for work-required use of an employee’s own automobile is the mileage reimbursement method. Under this method, the employee keeps track of the number of miles driven to perform her job duties, and the employer multiplies the miles driven by a predetermined amount that approximates the per-mile cost of owning and operating an automobile. Although not required to do so, many employers use what is known as the IRS mileage rate, which is a rate set by the IRS for federal income tax purposes. This rate is based on national average expenses for fuel, maintenance, repair, depreciation and insurance. Because the mileage reimbursement method necessarily results in an approximation of actual expenses, an employee will always be permitted to show that the reimbursement amount paid is less than the actual expenses the employee necessarily incurred for work-required automobile use. If the employee can make such a showing, the employer must make up the difference.
The third, and final, method of calculating automobile reimbursement expenses is the lump-sum payment method. Under this method, the employee need not submit any information to the employer about miles driven or actual expenses incurred. Instead, the employer merely pays the employee a fixed amount (either through higher wages or commissions) for automobile expense reimbursement. This fixed amount should be based on the employer’s understanding of the employee’s job duties, including the number of miles the employee typically drives to perform those duties. In fixing this amount, the employer must be sure that it is sufficient to provide full reimbursement for actual expenses. If it is not, the employee will be permitted to challenge the amount of the lump-sum payment as insufficient.
It is important to note that there are numerous laws governing the payment of wages that do not apply to expense reimbursement. For example, there are tax consequences for both the employer and the employee associated with classifying payments to employees as wages, rather than expenses. The amount payable as wages is also subject to minimum wage laws. Finally, California Labor Code section 226 requires employers to provide its employees with itemized wage statements containing a host of information. In order to make it easier to show compliance with these various wage laws, an employer who chooses to use the lump sum payment method would be well advised to pay the lump sum separately from its employees’ regular wages. Alternatively, if an employer chooses to combine the wage and lump sum payments into one check, the employer should separately identify the amount of the combined payment that represents wages, and the amount that represents reimbursement for expenses.
Wilke, Fleury, Hoffelt, Gould & Birney Labor & Employment News, February 2008, Volume 11, Issue 1.