Synopsis Seyfarth: The COVID-19 pandemic push remotely affected many employers without notice or adequate time to prepare. Now that employees are settling into long-term remote work arrangements, employers are increasingly faced with questions about their expense reimbursement obligations. Employers are therefore advised to reassess the scope of potential expenses, statutory reimbursement obligations and the state of written policies to ensure maximum compliance with the law. To assist in these efforts, below, we provide a high-level summary of relevant laws, policy considerations and best practices. We recommend that you direct state-specific inquiries directly to the Seyfarth attorney of your choice.
The legal scenario
According to the Fair Labor Standards Act (“FLSA”), there is no requirement to reimburse direct expenses. FLSA, however, is implicated if an employee’s unreimbursed business expenses reduce their wages below the applicable minimum wage or reduce the amount of overtime.
Before the pandemic, employees whose wages were equal to or close to the minimum were not normally among the categories of workers who worked remotely on a routine basis. As a result, many employers may be experiencing the interaction of remote work expenses with the minimum wage for the first time. Under this “new normal”, employers must be aware of the expenses that these workers may be incurring; in particular, with regard to single purchases of higher tickets that could leave them below the minimum wage, such as a printer or other home office equipment needed for their work (more to come in the “necessary” critical modifier).
At the state and local level, there are currently 10 jurisdictions that have statutes or jurisprudence specifically addressing an employer’s requirement to reimburse business expenses, typically: California, Iowa, Illinois, Massachusetts, Montana, New Hampshire, North Dakota, South Dakota, District of Columbia and Seattle, Washington. Another 14 states have statutes that address the employer’s obligation to reimburse expenses for tools and equipment that may come into play: Colorado, Indiana, Kansas, Maine, Nebraska, North Carolina, Michigan, Minnesota, North Carolina, Oregon, Tennessee , Vermont, Virginia and Wyoming. Other states still require the employer to reimburse employees in a manner consistent with their written policies.
These states vary widely as to which expenses are to be reimbursed. For example, some of these states – notably California and Illinois – have strict reimbursement laws. As explained below, reimbursement may be required in these states for business-related use, even if the employee does not incur extra expenses, such as when an employee has an unlimited amount of data and minutes on their cell phone. In that case, even if there is no additional cost for the employee, the employer must reimburse for not enjoying an “unexpected gain”, some courts have argued.
In still other states, the statutes suggest that the employer is largely under the responsibility of what he authorizes, for example, explicitly or through written policy. And in still other states, employers are required by law only to reimburse losses incurred that are outside the “normal risks” of the business in which he is employed. Significantly, even if a state does not have a statute covering general business expenses, the investigation may not end there because case law can create an obligation. Although state law cannot be characterized as “uniform” across states, below are some key components to consider when revisiting any obligations under these state laws.
But is it really necessary?
One of the main components of the most costly expense reimbursement laws is the requirement for reimbursement for any required expense, which raises many questions about what types of expenses should be reimbursed. Data from Internet services and cell phones are the most commonly considered, but what about printers and paper? Some employees may prefer to print documents, but does the job really require it? A ring of light may be good for all Zoom meetings, but it is required?
While the question of necessity revolves around the specific job in question, it is imperative that employers set clear expectations about what tools they need for an employee’s home office and what is not needed to do the job. Employers, of course, want to ensure that employees who work from home have a safe and productive workspace. But they should also be aware that the more requirements that are put in place for minimum home office standards – such as minimum WiFi bandwidth, a room with a door to ensure confidentiality of calls, lock file cabinets – the more likely it will be an expense incurred to meet these standards should be considered necessary.
Another component for assessing whether an expense incurred was necessary is whether the employee could have met the need at a lower cost. Perhaps a webcam is required due to the manager’s expectation for regular videoconferences, but does it have to be the most modern model or would a cheaper option suffice? The establishment of expectations in written policies with guidelines and procedures for prior approval of such purchases will allow the employer to define the universe of necessary expenses.
Employers should also consider whether it is more economical to provide equipment, cell service or Wi-Fi service or other necessary equipment directly than to reimburse. Employers often have bulk discounts or stock at the office that can be shipped to an employee’s home at a lower cost.
Was the expense actually incurred?
It seems simple enough that only the expenses actually incurred should be reimbursed, but this issue is not always so simple. This is particularly true in certain states with respect to “mixed use” items that an employee uses to both business and personal reasons, such as a cell phone or home Internet data plan. Is there a refundable expense if the employee incurs no additional cost to use a personal cell phone or connect to his home wireless Internet network for work purposes? The answer probably depends on where the employee is located.
In California, for example, statutory language requires employers to reimburse “all necessary expenses or losses incurred by the employee as a direct result of fulfilling their obligations” or under the direction of the employer. Although this may sound just like the costs that would not have been incurred, but for the job, this is not how the statute was interpreted. Quite the contrary, Golden State courts interpret this to require reimbursement of a “reasonable percentage” of the employee’s monthly cellular and internet data costs, even if the employee had unlimited data plans and a home internet network for personal use and even if the employee’s monthly bills have not increased as a result of commercial use.
In Illinois, although similar statutory language requires reimbursement of “necessary expenses”, there is additional useful language in the law that allows employers to set parameters on how much they will contribute to these expenses (provided it is not “de minimus”).
Managing Compliance
Employers can fulfill their obligations to reimburse business expenses in several ways.
A common approach is to provide a fixed monthly stipend based on a reasonable and good faith estimate of an employee’s reimbursable expenses. This approach will generally cover the vast majority of expenses, but it must still be associated with a process by which employees can claim reimbursement for additional expenses that were not covered by the stipend. In addition, we advise employers to keep documentation to support the reasonableness of the stipend they set, in case the stipend amount is considered too small (so that it does not cover the employer’s full refund obligation) or too much (so the excess should be treated as compensation for work and not as reimbursement).
Alternatively, employers can establish a process whereby employees are only reimbursed after sending a receipt or other documentation confirming that they have actually incurred expenses. There may also be some tools and equipment that the employer can provide in a more economical way if you buy them directly.
Regardless of the specific way to ensure that an employer does not improperly transfer business expenses to its employees, all employers must be aware of their obligations to reimburse, review and update their expense reimbursement policies to take into account applicable law and expenses of your new expanded remote workforce may incur. The policy should clearly articulate the employer’s expectations of the tools and equipment needed to do the job at home and establish protections for when and how employees can purchase equipment with the expectation that the company will pay the bill.