Must an Employee Ever Honor an Obligation to Repay the Employer?

In general, California law requires an employer to reimburse its employees for business-related expenses incurred on behalf of the employer.  California Labor Code 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[1].” This section only applies to expenditures made or losses sustained by the employee and only then when they are necessarily incurred.[2]  Therefore when faced with a demand for reimbursement for employee expenditure, an employer should ask:

  1. Did the employee actually make expenditures or incur losses?
  2. Were the expenditures or losses incurred in direct consequence of the discharge or the employee’s duties or obedience to the employer’s directions?
  3. Were the expenditures or losses necessary?[3]

If the answer to any of these questions is no, then reimbursement will not be required under section 2802 – although reimbursement may be required when an employer makes a contractual commitment to reimburse beyond the statutory requirement.

Conversely, some employers may incur conditional costs that aim to benefit both parties.  For example, an employer may agree to pay an employee’s educational or training pursuits on the condition that the employee remains employed with the employer for a specified period of time after the education/training is complete.  In this way the employer benefits from its expenditure through the employee’s continued work and performance.  Of course, the penalty for failing to remain employed for the promised duration is typically a demand that the employee reimburse the employer for the educational expenditure.

As such, a question arises whether the employer may demand reimbursement for the educational expenditure when Labor Code section 2802 requires the employer to pay for expenditures incurred in the employment relationship.  This issue is compounded by the protections found in Labor Code section 2804, which provides that an employee’s right to indemnification cannot be waived by contract.[4]

This particular issue was addressed by a California court in USS-Posco Industries v. Case,[5] which upheld summary judgment in favor of the employer who demanded repayment when an employee left the job only two months after he completed the employer-sponsored education program. USS-Posco Industries (UPI) faced a shortage of Maintenance Technical Electrical (MTE) workers. To remedy this, UPI implemented a voluntary Learner Program to train current employees to be MTEs. The Learner Program was a three-year training program at the end of which, after passing the exam, employees would fill one of the vacant MTE positions. Employees who participated in the program were required to enter into a repayment agreement stating that they would reimburse UPI in the event they voluntarily terminated employment within 30 months of completing the program.

The employee, Floyd Case, completed the Learner Program and then quit UPI two months later to work for Lawrence Livermore National Laboratory as a high voltage electrician. Case refused to reimburse UPI for the Learner Program as required by the reimbursement agreement. Case claimed he was entitled to indemnification[6] and that he could not waive that right by entering into the reimbursement agreement.[7]

In analyzing section 2802, the court held that Case did not make any expenditure or suffer any loss in direct consequence of the discharge of his duties by participating in the Learner Program, and thus was not entitled to indemnification. Rather, the court found he received a benefit because UPI fronted the costs of his voluntary undertaking of the advanced training. Further, even if Case were found to have made a qualifying expenditure or incurred loss, such expenditure or loss was not necessary. First, the program was entirely voluntary. And, second, there were at least three ways to secure an MTE position: (1) pass the MTE test without any training; (2) self-study; or (3) participate in the Learner Program. Case voluntarily chose the third option and thus was not entitled to indemnification.  The court ordered Case to honor his obligation to repay UPI subject to the terms in the reimbursement agreement.

In summary, an employer must indemnify (reimburse) employees for the business-related expenditures incurred on behalf of the employer.  However, when an employee enters an agreement for his own benefit on a voluntary basis, the employer may, in limited circumstances, obligate the employee to reimburse the employer if all the conditions of the benefit are not met.  Employers should proceed cautiously in this area.  Only in these limited circumstances would an employee be obligated to reimburse the employer.  The obligation is almost always the reverse with the employer obligated to reimburse the employee.  Still, employers have certain rights and, when properly documented in an enforceable agreement, can demand employees comply with lawful promises and conditions.

[1] Cal. Lab. Code § 2802(a).

[2] Gattuso v. Harte-Hanks Shoppers, Inc. (2007) 42 Cal.4th 554, 567.

[3] Cassady v. Morgan, Lewis & Bockius LLP (2006) 145 Cal.App.4th 220, 230.

[4] Cal. Lab. Code § 2804.

[5] Contra Costa County Super. Ct. No. MSC1102781

[6] Cal. Lab. Code § 2802(a).

[7] Cal. Lab. Code § 2804.