Employee-Expense-Report-9144771-300x200Editor’s note:  This post originally appeared on BakerHostetler’s Employment Law Spotlight blog.

On Tuesday, August 12, 2014, the California Court of Appeal (Second Appellate District) published a decision that could impact many employers in California. The threshold question at issue in the case was whether an employer was required to reimburse its employees for the reasonable expenses they incurred for the mandatory use of a personal cell phone to handle work-related calls. Related issues surfaced, such as whether the answer to this question would change if: (1) a third party, and not the plaintiff, paid the cell phone bill; or (2) the employee did not need to change his/her cell phone plan to accommodate for the increased usage.

In Cochran v. Schwan’s Home Service, Inc., the plaintiff filed a putative class action against Schwan’s Home Service, Inc., seeking, among other things, to certify a class of customer service managers for the claim that defendant failed to reimburse their work-related cell phone expenses pursuant to California Labor Code Section 2802. Section 2802 provides that 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.” Section 2802 was enacted to prevent employers from passing operating expenses on to their employees.

The trial court denied the plaintiff’s class certification motion, noting that issues persisted concerning whether the cell phone charges were incurred by the plaintiff or his girlfriend, and that the employer would be entitled to ask whether each class member purchased a different cell phone plan due to his/her work-related cell phone usage. The trial court also noted that establishing that an employee incurred an expense was an issue of liability, not damages, since there would be no liability under the statute if no expense was incurred. The trial court held that the plaintiff’s expert’s suggested survey could not be used to prove classwide liability because there was no pattern or practice regarding the expenditures or losses of class members. For example, the plaintiff had not demonstrated how the cell phone plans and method of payment exhibited by a portion of the class would be representative of the entire class. For these reasons, the trial court denied certification due to lack of commonality and because it found that a class action was not the superior method of litigating the claims.

The appellate court found that the trial court’s assumptions were erroneous and reversed its decision. The appellate court held that an employee incurs an expense under Section 2802 if the employee is required to make work-related calls on a personal cell phone, regardless of whether the plaintiff or a third party pays for the cell phone bill. In addition, the appellate court held that whether the employee changed plans to accommodate for the work-related cell phone usage was irrelevant. The court based its reasoning, at least in part, on the statutory purpose of Section 2802, as stated above. In other words, this interpretation of the statute prevents employers from passing on operating expenses to their employees. Were it to find otherwise, the court reasoned, employers might dig into the private lives of their employees to unearth how they handle their finances, and employers could receive a windfall depending on the answers revealed by that inquiry.

Further, the appellate court reversed the lower court by finding that details of the employee’s cell phone plan do not present issues of liability—only damages. The appellate court noted that these damages issues are more complicated, and because of the differences in cell phone plans and work-related scenarios, the calculation of reimbursements must be left to the parties in any given case. The court also mandated that the considerations of Duran v. U.S. Bank National Association, 59 Cal. 4th 1 (2014), regarding statistical methods such as sampling, be taken into account at the trial court level.

The Take Away: Employers must be careful to reimburse reasonable business expenses incurred by its employees when the employer knows or has reason to know of the expenses incurred, regardless of whether the employee or a third party ultimately pays the expense, or whether the employee can absorb that expense without any additional loss.