California businesses with employees should pay close attention to Jessica Potts v. Sirius XM Radio, Inc., et al.[i] Ms. Potts, like many employees, set up a home office during the COVID-19 pandemic. She sustained expenses for which she was not indemnified by her former employers, Sirius XM Radio Inc. and Pandora Media, LLC (collectively “Sirius”). She sued, alleging Sirius violated California Labor Code § 2802. The appeal followed the trial court’s granting of summary judgment to Sirius. After a de novo review, the appellate court affirmed the trial court’s decision.

As the matter pertains to California employment law, the applicable California Labor Codes section is §2802(a), which states:

“[a]n 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, even though unlawful, unless the employee, at the time of obeying the directions, believed them to be unlawful”[ii]

In turn, §2802(c), which would permit the recovery of attorney’s fees, states, “[f]or purposes of this section, the term ‘necessary expenditures or losses’ shall include all reasonable costs, including, but not limited to, attorney’s fees incurred by the employee enforcing the rights granted by this section.”[iii]

The main focus of the review was on whether or not Sirius had constructive or actual knowledge of Ms. Potts’ claimed expenses. The appellate court noted, “Under California law, ‘before an employer’s duty to reimburse is triggered, it must either know or have reason to know that the employee has incurred an expense. Once the employer has such knowledge, then it has the duty to exercise due diligence and take any and all reasonable steps to ensure that the employee is paid for the expense.”[iv] Essentially, an employer cannot be expected to reimburse an employee for expenses of which it has no knowledge.

Ms. Potts, at no point during her employment, made a request for expense reimbursement. Additionally, as noted by the appellate court “. . . Sirius exercised due diligence by taking reasonable steps to ensure that Potts was paid for any such expenses by maintaining reimbursement policies and asking Potts to submit any outstanding reimbursement requests before she left the company.”[v] In fact, it was during discovery that Sirius was provided with documentation of Ms. Potts’ claimed expenses. Effectively, because she was unable to demonstrate Sirius had actual or constructive knowledge of her claimed expenses or referencing any authority to maintain that her employer would be liable under California Labor Code §2802 in a situation where an employee has withheld reimbursement requests/documentation and then produces them following the filing of a lawsuit, the trial court’s decision was affirmed.

Bearing in mind the California pro/friendly-employee climate, the ruling by the trial court and affirmation by the appellate court is a welcome reprieve for California employers. However, while the labor codes impose obligation of affirmative conduct on employees, it is essential for California employers to maintain an up-to-date reimbursement policy which is incorporated into their Employee/Company Handbook and on-boarding materials. Additionally, it would serve the interests of employers to ensure, as seen by Sirius’ conduct, to follow through with its due diligence and require all employees leaving the company to submit any expense reimbursement requests prior to their exit and to sign a document confirming that their expenses owed were reimbursed or there were no expenses incurred.

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Sources

[i] Jessica Potts v. Sirius XM Radio, Inc., et al., No. 23-55282 (9^th Circuit 2024)

[ii] Id.

[iii] Id.

[iv] Id.

[v] Id.