In Gattuso v. Harte-Hanks Shoppers, Inc., Case No. B172647 (October 27, 2005), the California Court of Appeal considered Harte-Hanks Shoppers, Inc.’s policy of paying increased base salary and commission rates to cover mileage reimbursement expenses, and found this payment scheme complied with the law. Harte-Hanks, the marketing company that distributes PennySaver, California Shopper, and other similar advertising publications, employs both Inside Sales Representatives (“ISRs”) and Outside Sales Representatives (“OSRs”). Harte-Hanks’ ISRs and OSRs sell the same products. However, ISRs do so by telephone in Harte-Hanks’ office, while OSRs drive their personal automobiles to sell Harte-Hanks’ products. Harte-Hanks’ OSRs are paid a higher base salary and commission rate than its ISRs, in order to compensate the OSRs for automobile expenses.
Plaintiffs challenged this practice under California Labor Code Section 2802, which requires an employer to “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 . . . .” Labor Code Section 2804 prohibits employee waiver of this benefit. Plaintiffs argued Section 2802 requires employers either to reimburse employees for actual expenses incurred or to pay a reasonable per mile rate, and that Harte-Hanks’ payment of increased salaries or commissions did not satisfy Section 2802 and therefore constituted an invalid waiver under Section 2804. Plaintiffs pointed to the fact that the additional compensation is taxed as ordinary income and that such compensation is unrelated to actual expenses or miles traveled. The Court of Appeal could locate no authority for the proposition that Section 2802 required payment in either of these two specific manners, noting that neither the Industrial Welfare Commission (“IWC”), the state agency empowered to formulate regulations, nor the Division of Labor Standards Enforcement (“DLSE”), the state agency empowered to enforce California’s labor laws, had promulgated any regulations, rules or policies prohibiting Harte-Hanks’ method of reimbursing mileage. The Court of Appeal further pointed to several DLSE publications indicating the employer and employee could agree to a method of mileage reimbursement.
The Court of Appeal did note that a violation of Section 2802 would occur if the increased compensation was insufficient to indemnify Harte-Hanks’ OSRs for the automobile expenses actually incurred in the discharge of their work-related duties, and that any taxes the OSRs were obligated to pay on the increased compensation must be taken into account in performing this calculation.
The Court of Appeal also affirmed the trial court’s decision to deny class certification of plaintiffs’ claims. The Court of Appeal found:
- the trial court reasonably concluded the resolution of whether Harte Hanks’ compensation system was sufficient to indemnify the OSRs for their automobile expenses within the meaning of Section 2802 entailed an individualized inquiry with respect to each OSR, and plaintiffs had consequently not established they could meet the community of interest requirement for class certification
- the record was replete with evidence showing there was disagreement between the named plaintiffs and potential class members, many of whom did not believe they were harmed by Harte-Hanks’ policy, and the circumstances of the two named plaintiffs were not typical, and consequently plaintiffs had not shown the typicality requirement for class certification was met; and
- plaintiffs had failed to address the superiority of proceeding on a class basis.
Although favorable to employers, the benefits of this ruling may be somewhat limited by the DLSE policy regarding reimbursement. The DLSE has determined employers may satisfy their obligation under Section 2802 to reimburse employees for all automobile-related expenses incurred by employees in the discharge of their duties in one of two ways. First, an employer may reimburse employees for mileage at the IRS mileage rate (recently raised to 48.5 cents per mile). Reimbursement at this rate will cover all reasonable operating costs incurred by employees using personal vehicles for business purposes, including damage or loss due to accident or theft (with some limited exceptions). Second, an employer may reimburse employees for actual costs incurred, including losses due to accident or theft. It is not entirely clear which of these options Harte-Hanks’ payment policy would satisfy. Employers choosing to pay increased commissions to reimburse employees for mileage may therefore want to specify that the commissions include such reimbursement, at the IRS mileage rate. Such a payment system may still present some risk, at least in a proceeding challenging the system before the DLSE.
For more information on this issue, please contact a member of the Labor and Employment Practice Group in one of our offices.