Client Advisory - Labor & Employment
There are two recent developments in employer’s obligations to their current and former employees. The first deals with expense reimbursement and the second involves an employer’s new obligation regarding COBRA notices.
In this current economic climate, with reductions in forces and layoffs occurring on a daily basis, employees are increasingly turning to the Labor Commissioner and the court system to adjudicate various grievances. This new trend is placing employer policies and their Labor Code compliance under a microscope searching for violations which could serve as a basis for a lawsuit.
One such provision garnering increasing attention by employees is Labor Code section 2802. Section 2802 states “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 . . .”. While this provision is broad enough to encompass many items, the most common business expenditure which implicates this provision is travel expenses. For instance when an employee uses his or her personal vehicle for company business such as running errands for the business, making bank deposits, picking up lunch for the employees, etc. the employee has incurred an expense to which he or she is entitled for reimbursement.
Recently, Starbucks settled a class action brought on behalf of its retail managers for a reported $3,000,000.00. The employees alleged that they used their personal vehicles to perform work related duties. The duties included making bank deposits, getting supplies from venders, attending meetings and training. The Starbucks’ employees alleged that they requested reimbursement for mileage, however, they were advised that as a matter of policy Starbucks did not reimburse employees for mileage expenses. Such a policy is a violation of California Labor Code.
It is important to remember that any time an employee uses their own vehicle on company business, the employee has incurred expenses which can take the form of fuel as well as wear and tear on the vehicle. There are three common methods to reimburse employees for expenses incurred in the course of their duties: (1) actual expense method; (2) lump sum payment; and (3) IRS mileage reimbursement.
The safest method to ensure employees are reimbursed for actual expenses incurred in dispensing their duties is also the most administratively onerous and burdensome for both the employer and the employee. The actual expenses of using an employee’s personal automobile for business purposes include fuel, maintenance, repairs, insurance, registration, and depreciation. To calculate the reimbursement amount using the actual expense method, the employee must keep detailed and accurate records of the amounts spent in each of these categories. Calculation of depreciation will require information about the automobile’s purchase price and resale value (or lease cost). In addition employee must keep records of the information needed to apportion those expenses between business and personal use. This is generally done by separately recording the miles driven for business and personal use. The employee then must submit all of this information to the employer for calculation of the reimbursement amount due. (Gattuso v. Harte-Hanks Shoppers Inc. (2007) 42 Cal. 4th 554).
Not only would the employer have to consider the actual expenses that the employee incurred but the employer would also have to determine whether each of these expenses was necessary which in turn depends upon the reasonableness of an employee’s choices. Thus, calculation of an automobile expense reimbursement using the actual expenses method requires not only detail record keeping by the employee and complex allocation calculations, but also the exercise of judgment by the employee, the employer, and officials charged with enforcement of Section 2802 to determine whether the expenses incurred were reasonable and therefore necessary. This method is an administrative nightmare and would lead to unnecessary disputes over whether actions taken by the employee were reasonable and necessary. Therefore the actual expense method is not the recommended method to ensure employee reimbursement.
The second method for employee reimbursement is known as the lump sum payment method. Under this method, an employee is paid a fixed amount for automobile expense reimbursement without the need to submit any information to the employer regarding the work required, miles driven, or the automobile expenses incurred. The fixed amounts take various forms such as per diems, car allowances, and gas stipends. The amount would be based on the employers understanding of the employee’s duties including the number of miles the employee typically drives to perform those duties.
Importantly, if the lump sum payment method is used it is crucial to make sure the employer complies with Labor Code section 226 which requires an accurate itemized statement showing a breakdown of all of the compensation earned by the employee. All employers are encouraged to review this provision to ensure that their pay statements accurately comply with the Labor Code mandates. Thus, in order to ensure compliance with both Section 2802 and Labor Code section 226 employers are advised to separately identify the amounts that represent payment for labor performed and the amounts that represent reimbursement for business expenses separately on an employee’s paycheck. This would include those employers that provide business expense reimbursement to
employees through increases in base salary or commission rates. If you currently reimburse your employees in that manner, please separately identify the amounts for wages earned from the amounts representing reimbursement for business expenses.
The third and most common method for reimbursement of employees for work requiring the use of an automobile is the mileage reimbursement method. Under this method, the employee need only keep a record of the number of miles driven in performance of his or her duties. The employee then submits that information to the employer who then multiplies the work required miles driven by a predetermined amount that approximates the per mile cost of owning and operating an automobile.
The Internal Revenue Service has calculated an automobile mileage rate for Federal Income Tax purposes based on national average expenses for fuel, maintenance, repair, depreciation and insurance. The IRS mileage rate is widely used and accepted for calculating reimbursable employee automobile expenses. However, the mileage reimbursement expenses is not necessarily dispositive of the issue regarding the actual expenses incurred by the employee. Since the mileage reimbursement method is inherently less accurate than the actual expense method, an employee is permitted to challenge the resulting reimbursement payment if the employee can show that the reimbursement amount the employer has paid is less than actual expenses that the employee has necessarily incurred for the work required automobile use. If an employee successfully establishes entitlement to an amount greater than the mileage reimbursement, the employer must make up the difference. However, in our experience any challenges to an employer using the IRS standard reimbursement rate, currently at $ 0.55¢ per mile, are extremely rare.
Given the unfavorable outcome of the Starbucks case and the renewed interest in Labor Code section 2802 by plaintiff’s attorneys, we recommend that all employers review their employee handbook to ensure that the language contained complies with Labor Code section 2802. Second, regardless of the method chosen to reimburse the employees, an employer should implement procedures made known to its employees to claim and receive reimbursement for travel and other expenses incurred in the course of dispensing their duties. This could be as simple as a monthly mileage reimbursement log which employees are required to turn in at the end of each month with a list of the miles driven, the date, a description of the work related activity undertaken, and the number of miles it took the employee to perform that activity.
COBRA NOTICES
Though it has not received much media attention, the American Recovery and
Reinvestment Act of 2009 signed into law by President Obama on February 17, 2009, imposed additional obligations on employers subject to COBRA (i.e. companies with 20 or more employees who offer health plans subject to COBRA). First, the Stimulus Act creates a new subsidy for eligible employees which will cover 65% of an eligible employee’s month COBRA premiums for up to nine (9) months. However, depending on the nature of the group health plan, an employer may be obligated to front the subsidy payments for the government and be repaid through tax credits. Additionally, the subsidy is retroactive in that employees laid off or involuntarily terminated during the last four (4) months of 2008 will have a second chance to elect COBRA coverage and begin receiving the subside. Specifically, employees who were terminated or laid off between September 1, 2008, and December 31, 2008, could be required to pay only 35% of their COBRA premium with either their employer, the group health plan, or the insurer paying the remaining 65% of the premium and then being forced to recoup that cost from the Federal Government by taking a credit against payroll tax transmittals sent to the IRS or receiving a direct payment from the Federal Government.
Additionally, for all employees terminated between September 1, 2008, and February 17, 2009, an employer must provide a Special Election COBRA Notice to all employees terminated during this time period who did not elect COBRA coverage when first eligible. This Special Election Notice must inform the employees and their dependents of the availability of the subsidy and provide a new sixty (60) day COBRA election period.
Moreover, employers must provide new COBRA notices to those employees who leave (or have left) employment for any reason between September 1, 2008, and December 31, 2009. The new notice must explain the new COBRA rights including the information regarding the subsidy.
While this subsidy may make it easier for employees to afford the COBRA coverage, the new law imposes additional burdens and costs on the employers. In order to ensure compliance with the new COBRA obligations, covered employers should compile a list of employees terminated since September 1, 2008, to determine who may be eligible for the COBRA subsidy and/or the Special Election Notice. We recommend that employers consult with their insurance brokers and healthcare plan administrators to ensure that COBRA premiums are sent correctly. Employers are advised to examine their own payroll departments or outside payroll services are prepared to claim the COBRA subside credits against payroll tax transmittals.
Lastly, employers are advised to update their form COBRA notices to include all of the new required information and make sure the notices are delivered to the eligible employees and their dependents.
For more information, or questions, please contact Keith A. Kelly at Varner & Brandt at (951) 274-7777.
