In addition to the numerous and often mind-numbing requirements placed upon employers in the Golden State, Labor Code Section 2802 requires that an employer “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.”  The most common employee “expenditure” seen by businesses relates to the use of an employee’s personal vehicle in connection with his or her job duties, such as driving a personal vehicle to an outside sales call.  

Section 2802 itself provides little guidance on how employers can properly reimburse employees for such expenses, but we offer the following clarification on some frequently asked questions:

Do I Have To Pay My Employees For The Amount They Actually Spent On Gas And Their Cars? 

          Not necessarily. While employers are permitted to reimburse employees for their actual vehicle expenses (fuel cost, maintenance and repairs, and vehicle depreciation), this is often incredibly burdensome.  Reimbursements vary widely between employees for the same business trip and require hyper-individualized calculations.  For example, one employee may drive a reliable and fuel efficient hybrid car, and another may drive a vintage SUV with a large V-8 engine that gets 10 miles per gallon.  It is burdensome to track the actual costs associated with these different vehicles and changes in fuel costs, let alone provide an itemized statement on how these costs were calculated.  Most employers find this method of reimbursement untenable.  Fortunately, there are other options

Can I Pay My Employees By The Mile For Their Vehicle Expenses?  

          Yes. One common road employers take to reimburse vehicle expenses is the mileage reimbursement method.  The employee keeps track of the miles he or she drives a personal vehicle for work related duties and the employer then multiplies the number of miles by the current IRS mileage reimbursement rate ($0.565 per mile for 2013), which is presumed to be sufficient,  to determine how much is owed to the employee.  (You could choose to reimburse with a different mileage rate, but would then have the burden of proving that it sufficiently reimburses for the costs incurred.)  The chosen rate takes into account factors such as depreciation, maintenance and repairs, and actual fuel costs without having to actually calculate these costs for each particular vehicle.  However, when using this method, there are additional important considerations for employers:

  • Constantly keeping track of miles is burdensome for both the employer and the employee and distracts from the core mission of an employer’s business.
  • The employer needs to provide an itemized statement for the reimbursement that includes how the reimbursement was calculated.
  • The employer needs to maintain the mileage records for at least three years.

Tedious Monthly Calculations And Recordkeeping Of Mileage For Each Of My Employees Places A Real Burden On My Staff.  Is There A Different Path I Can Take? 

          There is. The California Supreme Court has confirmed that the actual expense and mileage reimbursement methods discussed above are not the only acceptable ways to reimburse employees for vehicle expenses.  Instead, you may also pay employees additional compensation in the form of an increased base salary, increased commissions, lump-sum payments such as a per diem, a car allowance or a gas stipend to cover vehicle expenses.  This alternative method of reimbursement has several potential advantages including increased ability to forecast business expenses, simplified payroll calculations, and decreased need to collect and maintain records regarding employee vehicle expenses. 

If you chooses this route, there are a few things to keep in mind:

  • You must designate which portion of the employee’s wages are intended to cover vehicle expenses.  Employers should have a written policy that specifically identifies how the expenses are to be reimbursed (through a lump sum, increase in salary, etc.), and distribute that policy to employees before implementing it.
  • The additional compensation, regardless of what form it takes, must be sufficient to cover the employee’s anticipated expenses after payroll deductions are taken from that compensation. 
  • It is also a good idea to have a mechanism in place where an employee can seek additional reimbursement of expenses if the employee ends up significantly exceeding the number of miles that he or she normally drives in a work month.

Workplace Solutions:  All California employers should maintain written policies that address reimbursement of their employees’ necessary business expenditures.  While it may seem that this is just another administrative nightmare facing your company, those policies can be focused to meet the needs of your company.  Reviewing and tailoring your expense reimbursement policies with the assistance of counsel can streamline the reimbursement process for your staff and prevent headaches down the road.