Employers Free To Compensate Employee Expenses Through Higher Salaries And Commissions

In Frank Gattuso et al. vs. Harte-Hanks Shoppers, Inc. 2005 WL 2787839, Cal.App. 2 Dist., Oct. 27, 2005, a California Court of Appeal considered whether under California Labor Code Section 2802, employees of a distributor of advertising publications were entitled to payment for actual expenses for the use of their automobiles during their work, or if the employer could compensate them through higher salaries and commissions. The Court found that the company did not violate Section 2802 by paying higher base salary and commission rates rather than compensating for actual automobile usage, and decided that the employees had no grounds for a class action suit.


Frank Gattuso and Ernest Sigala were Outside Sales Representatives (OSRs) for Harte-Hanks Shoppers, Inc., a distributor of advertising publications in California. OSRs like Gattuso and Sigala used their automobiles while selling their products, while Inside Sales Representatives (ISRs) conducted sales by telephone rather than visiting customers. To compensate for the vehicle costs, Harte-Hanks paid higher salaries and commission rates to OSRs than to ISRs, but did not separately identify automobile costs on pay stubs.

Gattuso and Sigala filed a class action complaint against Harte-Hanks under Section 2802, seeking payment of expenses for the use of their automobiles in their jobs. The trial court found that employers were required to compensate employees for automobile expenses, but that they could do so by paying increased wages or commissions instead of actual expenses. The court also denied plaintiffs’ motion for class certification because they lacked commonality due to the widely diverse methods by which the company compensated its OSRs. The plaintiffs appealed both the interpretation of Section 2802, and the denial of class certification.

Appellate Court Decision

The appellate court agreed with the trial court, and ruled that Section 2802 permits an employer to pay increased salaries or commissions instead of reimbursing automobile expenses. It found that Section 2802 does require employers to indemnify workers for their expenses, but that on its face, the statute does not specify any particular method to do so.

A violation of Section 2802 would occur only if the increased compensation was inadequate to cover the OSRs’ use of their cars, the court held. If the compensation were in the form of taxable wages, then the amount of taxation should be taken into account to ensure that the compensation is adequate. The court also said it found no rules or standards put forward by either the State Industrial Welfare Commission nor the Department of Labor Standards Enforcement that would preclude Harte-Hanks’ payment arrangement. The court therefore concluded that plaintiffs had failed to establish any error by the trial court.

The appellate court also agreed that plaintiffs did not have sufficient common legal and factual issues to justify a class action. It found substantial evidence to support the trial court finding that plaintiffs’ claims were not typical of those of the class because the company policy had varying financial effects on individual OSRs.

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