When it comes to labor law, California has set the bar high when it comes to preventing employers from passing along expenses to employees. Here's a quick overview of CA Labor Code Section 2802 and ways employers can comply with the law.
What does Section 2802 require of CA employers?
California Labor Code Section 2802 requires employers to properly reimburse employees for all reasonable and necessary work expenses. But it can be a real challenge to properly reimburse employees because the law is so general:
“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.”
The costs considered reimbursable cover a wide range:
The rest of this article will focus, however, on methods of reimbursing business vehicle expenses.
How should employers reimburse vehicle expenses in California?
It can be a real challenge to find the best way to reimburse vehicle expenses. In 2007 the California Supreme Court in Gattuso v. Harte-Hanks Shoppers, Inc. found four reimbursement methods to be consistent with Section 2802(a), as long as employees are compensated for all the costs incurred in owning and operating the vehicle, including gas, oil, maintenance, tires, insurance, registration, and depreciation.
It should be noted that California is not the only state to indemnify employees from work-related expenses. If you have any employees incurring vehicle expenses in one of the states listed below, take a few minutes to use this calculator to determine whether your current vehicle reimbursement method works for that state.
The four approved ways to reimburse vehicle expenses, according to Gattuso v. Harte-Hanks are:
Method 1: Reimburse Mileage
This very common approach requires employees to log all business related mileage to be reimbursed at the established mileage rate. Typically the rate used is the IRS mileage rate, an income tax tool based on the previous year’s national average costs for fuel, maintenance, depreciation, and insurance. (For 2023, it is 65.5 cents per mile.)
The California Division of Labor Standard Enforcement has stated that the IRS rate is a presumptively reasonable estimate. If a company wants to pay less than the current IRS rate, it must be able to prove that the employee’s actual vehicle costs are less. Conversely, if the employee wants a higher rate, they must prove that the actual costs of owning and operating their vehicle exceed the IRS rate.
If your company reimburses mileage at less than the IRS rate, your company is in violation of Section 2802(a) – unless you’ve undertaken the laborious task of proving that employee costs are less than the IRS mileage rate. However, the IRS rate is not guaranteed to cover all employees' expenses. This is especially true of low-mileage drivers, given the high overall costs of operating a vehicle in California and the need to drive a minimum number of miles to cover those costs via a mileage reimbursement.
Method 2: Reimburse Actual Expenses
The second option for reimbursing business use of a personal vehicle is paying, dollar-for-dollar, the actual expenses. This approach involves tracking the exact costs associated with each employee’s car – fuel, oil, maintenance, tires, insurance, depreciation, registration, taxes – and then matching these costs with business purposes.
The actual expense method is often considered best practice due to its accuracy. However, reimbursing actual expenses is so time consuming to implement and manage that employers typically must outsource it to a third party.
Method 3: Pay a Vehicle Allowance
For the sake of simplicity, many companies opt to pay employees a set amount on a regular basis to cover business use of the vehicle. This compensation could take the form of a car allowance, a gas allowance, or a per diem. This approach doesn’t involve any business substantiation or require employees to log business mileage.
Once again, however, the employer must be sure that the allowance fully reimburses each employee for the actual costs of operating their personal vehicle. If the allowance falls short, the employer has violated the law. The payments in this approach are also taxable, so the employer needs to make sure the after-tax amount is sufficient to cover the employee's costs.
Method 4: Pay Higher Wages
The fourth option is rarely used. The employer simply pays higher wages to compensate for auto expenses. However, as with methods 2 and 3, the employer must be able to demonstrate that the boost in pay covers all of employee’s business vehicle costs.
If utilizing this method your company must communicate the methodology and formula used to calculate and reimburse employees for their personal vehicle expenses.
FAVR reimbursement – an additional way to comply with California's labor code
Can you prove that your current program can sufficiently reimburse every single one of your employees that operates in a state that indemnifies employees from work expenses?
If you suspect you may not be fully compensating or reimbursing employees for their car expenses, now is the time to commit to a full review of your program. During your review, you may want to consider exploring fixed and variable rate reimbursement – an approach that has a demonstrated track record of compliance with CA Labor Code, Section 2802. Non-taxable like the IRS mileage rate, FAVR has the added benefit of neither under-reimbursing low-mileage drivers or over-reimbursing high-mileage drivers.
Go ahead and start your review of company policies today with our CA Labor Code compliance calculator.