Setting Mileage Reimbursement Rates to Ensure Compliance with California Labor Code Section 2802

Robert A. Jones – Shareholder, Ogletree Deakins (San Francisco)
Mr. Jones is the former California State Deputy Secretary of the Labor and Workforce Development Agency, and Chief Counsel and Acting California State Labor Commissioner. Mr. Jones’ practice areas include Employment Law, Wage and Hour, Class Action, Litigation, and Traditional Labor Relations. robert.jones@ogletreedeakins.com

Lauren M. Cooper – Associate, Ogletree Deakins (San Francisco)
Ms. Cooper represents employers at all stages of litigation against a variety of employment-related claims, including discrimination, harassment, retaliation, wrongful termination, defamation, fraud, breach of contract, and wage and hour violations. Ms. Cooper’s practice also includes employer advice and counseling. lauren.cooper@ogletreedeakins.com

Ogletree, Deakins, Nash, Smoak & Stewart, P.C. | One Market Plaza, Suite 1300, Steuart Tower, San Francisco, CA 94105 | Phone 415.442.4810

2007 Proposed DLSE Regulations on Mileage Reimbursement

Before 2007, California Law was unclear on how employees had to be reimbursed for their expenses incurred in the required use of their own vehicles in connection with their work. The requirements were finally clarified by the California Supreme Court in November of that year in its decision in the case of Gattuso v. Harte-Hank Shoppers . However, earlier that year, in an effort to clarify the expense reimbursement requirement, the California Division of Labor Standards Enforcement (DLSE or Labor Commissioner) proposed a regulation on this issue. While that proposed regulation was never adopted, and should have been removed from the DLSE website, it unfortunately remains posted, adding some confusion to the subsequent Supreme Court decision in Gattuso .

The proposed DLSE regulation suggested that the Internal Revenue Service (“IRS”) standard vehicle mileage reimbursement rate, which is published annually, is presumed to be a reasonable rate for reimbursement of mileage to employees for use of their personally provided vehicles for work for miles driven during the effective period of each such IRS rate. The proposed regulation also provided that any employer who believes that a specific employee’s mileage reimbursement rate is less than the applicable IRS rate, has the burden of proving the necessarily incurred actual expenses of the employee for the use of his or her vehicle.

In its decision, the Supreme Court clarified that, while the IRS rate is a widely used and accepted mileage reimbursement rate, it is not required that employers use this rate to reimburse their employees for miles driven to perform job duties. Below is a brief discussion regarding the current law and what employers actually need to do to comply.

What is Really Required for Expense Reimbursement

In Gattuso , the California Supreme Court considered what an employer may do to satisfy its statutory reimbursement obligation under Labor Code section 2802 which requires an employer to indemnify its employees for expenses they necessarily incur in the discharge of their duties. The Court clarified that the following methods may be utilized to reimburse employees for the automobile expenses they necessarily incur in discharging their employment duties. In each of the methods it is important to note that only expenses necessarily incurred must be reimbursed.

Actual Expense Method

One method that an employer may use for automobile reimbursement is to calculate the automobile expenses that the employee actually and necessarily incurred and then separately pay the employee that amount. This method is the most accurate, but it is also the most burdensome for both the employer and the employee as it requires detailed records of the various expenses incurred by the employee such as gas, insurance, depreciation, repairs, and the like.

Mileage Reimbursement Method

When an employer uses the mileage reimbursement method to determine the amount of reimbursement due under section 2802 for work-required use of an employee’s own automobile, the employee need only keep a record of the number of miles necessarily driven to perform job duties. The employee then submits this information to the employer, who multiplies the work-required miles driven by a predetermined amount that approximates the per-mile cost of owning and operating an automobile. As indicated in DLSE opinion letters and policy statements, and as confirmed in the Gattuso decision, the federal IRS rate, which is based on national average expenses, is a widely used and accepted mileage reimbursement rate. An employer may also set a rate less than the IRS rate as long as the rate is based on objective evidence reflecting the average cost in the geographic area where the work is performed. However, because the mileage reimbursement method is merely an approximation of actual expenses, the employee must be permitted to challenge the resulting reimbursement payment. If an employee can show that the reimbursement amount is less than the actual expenses the employee has necessarily incurred for work-required automobile use, the employer must make up the difference. This ability to challenge the rate paid applies to both rates set by the employer and the IRS rate. Employers must make certain that its employees are informed of how they can effectively make such a challenge and what evidence they must supply to establish that the costs they have necessarily incurred are higher than is provided by the mileage rate they were paid.

Lump-Sum Payment

Labor Code section 2802 also permits employer use of a lump-sum method to reimburse employees for work-required automobile expenses, provided that the amount paid is sufficient to provide full reimbursement for actual expenses necessarily incurred. Again, if an employee can show that the reimbursement amount is less than the actual expenses the employee has necessarily incurred for work-required automobile use, the employer must make up the difference.

A major source of confusion when utilizing the lump-sum method to reimburse an employee for work-required automobile expenses is whether an employer must segregate the lump sum from other compensation or whether an employer can instead pay the lump sum in the form of an increase to an employee’s base salary or commission. The Supreme Court determined that an employer can satisfy its statutory business expense reimbursement obligation by paying employees enhanced compensation in the form of increases in base salary or commission rates, provided the employer establishes some means to identify the portion of overall compensation that is intended as expense reimbursement. The Supreme Court stated in the decision that the identified expense amount must be separately identified on the employee’s pay statement that is required by California Labor Code section 226(a). Again, utilizing this method does not discharge the employer’s obligation to fully reimburse the employees for all expenses actually and necessarily incurred if they are higher than the lump sum amount paid.

Bottom Line

An employer’s obligation under Labor Code section 2802 requires it to compensate an employee for all expenses actually and necessarily incurred. In doing so, the employer can utilize an actual reimbursement, mileage reimbursement, or lump-sum method. In addition, employees must be provided with a procedure by which they may challenge any payment as being insufficient to provide full reimbursement. Therefore, regardless of what method an employer utilizes to calculate automobile expense reimbursement, it should keep accurate records that identify the method used to calculate such expenses.

This article does not constitute legal advice. For advice regarding a particular situation, please contact a qualified lawyer of your choosing.

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