NOVEMBER 2005

II. JUDICIAL UPDATE

Compensation for Automobile Expenses

In Gattuso v. Harte-Hanks Shoppers, Inc., a California court of appeal held that an employer is permitted to pay increased salaries or commissions instead of reimbursing the employee for actual automobile expenses incurred. Harte-Hanks (“the Employer”) is a marketing company that employs both “Outside Sales Representatives” (“OSRs”) and “Inside Sales Representatives” (“ISRs”). The OSRs were required to drive their personal automobiles to perform their job duties. The ISRs sold many of the same products as OSRs, but do so by telephone. The OSRs were paid both a higher base salary and commission rates than ISRs in order to compensate the OSRs for automobile expenses.

In the case, two OSRs filed a class action lawsuit against the Employer for indemnification under California Labor Code section 2802, which provides in pertinent part: “An employer shall indemnify his or her employee for all necessary expenditures or losses incurred by the employee in direct consequence of the discharge of his or her duties, or of his or her obedience to the directions of the employer, even though unlawful, unless the employee, at the time of obeying directions, believed them to be unlawful.”

The court rejected the OSR’s argument that only two methods of automobile indemnification expenses were permitted: (1) actual automobile expense reimbursement or (2) payment of a reasonable per-mile rate, with the IRS rate being presumptively reasonable. Instead, the court of appeal agreed with the Employer’s argument and held that Labor Code section 2802 “permits an employer to pay increased salaries or commissions instead of reimbursing the employee for actual automobile expenses incurred or paying a reasonable mileage rate, . . . .” The court, however, also found that a violation of Labor Code section 2802 would occur, however, “if the increased compensation was insufficient to indemnify the [employee] for the automobile expenses incurred in the discharge of work-related duties.”

The Gattuso case potentially provides employers a third alternative to compensate employees for personal automobile use for company work – providing a higher base salary and commission rates. However, it is critical that this higher rate of pay actually cover the automobile expenses and be quantitatively higher than an employee who is not required to drive to conduct the employer’s business.

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