imageBy John R. Giovannone

We feel your pain, and we have a prescription for you to consider: a non-accountable expense reimbursement plan.

First, let’s discuss your problem. If you have a salesforce, the force exists to sell stuff. So here’s an exercise:

  • First, think of your entire outside salesforce.
  • Then, mentally separate out those salespeople who are best at selling stuff.
  • With this most effective group in mind, ask yourself, what does each person need to maintain his or her success?

Many of you, if truth be told, have no idea. You just want your good salespeople to keep doing … whatever it is that they’re doing … because, well, it’s working.

Effective sales people come in all forms and use all manner of methods: some wine and dine; others live on the phone; others rely heavily on encyclopedic product knowledge; others employ advanced statistics and analytics; some value regular face time with customers; others blur the line between their business and social lives; some might superstitiously choose to meet customers only at a favorite coffee shop; still others have forged such reliable customer bonds that their book of business sells itself with minimal maintenance.

What’s clear is that not all effective sales people do the same things—or incur the same expenses. But the last thing you want is for your expense reimbursement policy to crimp sales by stifling effective sales activities.

The Labor Commissioner, discussed here, has recognized the futility in guessing why or how sales are made. Outside salespeople, by definition, tend to do their own thing out in field; they “set their own time, and they’re on the road, they call on their customers[, in fact,] rarely do you know what they are doing. . . .” DLSE Op. Ltr. (September 8, 1998).

And while we don’t know precisely how salespeople sell, we can tell whether they’re selling by looking at their bottom line. If it takes a $300 concert ticket to make a $100,000 sale, that’s typically an acceptable return on investment. The trite quote is that it takes money to make money. If the results justify the expenses, who can question the seller’s methods? F. Ross Johnson (as played by James Garner in Barbarians at the Gate) had his own reaction to the second-guessing of expenses: “Every penny you think I’m [umsneezing] away here, comes back to us dressed up like a nickel!”

But when nickels start coming back dressed as pennies, an employer should be allowed to stop the bleeding, and ask, “Why am I buying your concert tickets again?” And as discussed below, it can be easier to say no to a particular expense without hampering one’s sales style if you employ a non-accountable lump sum expense reimbursement policy, because only the unique expenses will be brought to your attention, rather than the unique item being crammed in with an avalanche of coffee and parking receipts.

To understand non-accountable plans, start with the norm: accountable plans, whereby employees submit all receipts and seek reimbursements for each item of expense individually, permit the employer to determine that each and every expense is authorized, necessary, and reasonable. As discussed here, here, and here, the assessment and reimbursement of each such expense can be administratively daunting, requiring steps that consume resources without doing anything to increase revenue.

What about the non-accountable plan? The California Supreme Court, in Gattuso (2007), endorsed a lump-sum non-accountable method created “expressly for expense reimbursement,” as long as the amount paid is “sufficient to provide full reimbursement.”

How do we know if the amount is “sufficient” if we don’t know each expense? You don’t know what expenses salespeople incur unless they tell you each and every one, and avoiding that practice is precisely the point of a non-accountable plan. Instead, Gattuso advises employers to tell employees they can “challenge the amount of a (say, monthly) lump-sum payment as being insufficient” via “either the actual expense method or the mileage reimbursement method.”

The “actual” what method? The “actual” or “accountable” expense method requires employees to record all actual mileage costs and other expenses and submit them for reimbursement. But this method would be used only in exceptional cases if the employer uses an appropriate lump-sum method. Take for example, the same salesperson who wants to buy pricey concert tickets to entertain a customer. That expense alone might exceed the entire monthly allowance, but it can still be reimbursed via a separate accountable proposal for additional reimbursement given a unique circumstance. Or a salesperson may apply for an increase to the allowance, justified by increased sales. The company can respond, “You got it, here’s another $100 a month, keep up the good work.” Or, “Whoa, you’re incurring way too many expenses that are not justified by your sales, we’ll pay you for your overage already incurred, but let’s see how we can cut back and still allow you to be effective.”

How does one set the appropriate monthly allowance? The answer would be industry-specific, but it would seem reasonable to arrive at a periodically updated allowance amount based on a sampling of salespeople, and provide that the plan includes an application form for salespeople to occasionally seek more money and/or an allowance increase.

Still not convinced? With a non-accountable plan, you only get the receipts for those salespeople who seek more when faced with unique circumstances (all but eliminating the record-intensive administrative burden of accountable plans). Likewise, monthly allowances allow employers to better budget for expense costs. Higher-than-normal allowances can always be justified based on sales and other factors. And ultimately, if an employee ever claims inadequate reimbursement, any failure to apply for an increase would have to be explained. And on class allegations, each proposed class member would need to explain his or her failure to apply for an increased allowance—creating an individualized inquiry that should be sufficient to defeat class certification.

Need help drafting one? While the non-accountable expense reimbursement plan does not get enough press, it can be an attractive alternative to the traditional accountable plan. But not all non-accountable plans are created equally and a penny’s worth of prevention on the front end can avoid a pound’s worth of trouble later on. Our California Workplace Solutions lawyers can answer any questions you may have regarding expense reimbursement, as well as your outside sales job descriptions, commission plans, and performance assessment tools. If you decide you are looking to shore up your reimbursement or other salesforce policies, we’re here to help.

Edited by Julie Yap