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With advancing computational resources, 3-D inversion techniques have become feasible in recent years and are now a more widely used tool for magnetotelluric (MT) data interpretation. Galvanic distortion caused by small-scale near-surface inhomogeneities remains an obstacle for 3-D MT inversion which so far has experienced little attention. If not considered properly, the effect on 3-D inversion can be immense and result in erroneous subsurface models and interpretations. To tackle the problem we implemented inversion of the distortion-free phase tensor into the ModEM inversion package. The dimensionless phase tensor components describe only variations of the conductivity structure. When inverting these data, particular care has to be taken of the conductivity structure in the a priori model, which provides the reference frame when transferring the information from phase tensors into absolute conductivity values. Our results obtained with synthetic data show that phase tensor inversion can recover the regional conductivity structure in presence of galvanic distortion if the a priori model provides a reasonable assumption for the regional resistivity average. Joint inversion of phase tensor data and vertical magnetic transfer functions improves recovery of the absolute resistivity structure and is less dependent on the prior model. We also used phase tensor inversion for a data set of more than 250 MT sites from the central San Andreas fault, California, where a number of sites showed significant galvanic distortion. We find the regional structure of the phase tensor inversion results compatible with previously obtained models from impedance inversion. In the vicinity of distorted sites, phase tensor inversion models exhibit more homogeneous/smoother conductivity structures. [ABSTRACT FROM AUTHOR]