Seyfarth Synopsis: The COVID-19 pandemic thrust remote working upon many employers without notice or adequate time to prepare. Now that employees are settling into longer-term remote working arrangements, employers are increasingly confronted with questions regarding their expense reimbursement obligations. Employers are therefore well advised to re-evaluate the scope of potential expenses, legal obligations for reimbursement, and the state of written policies to ensure the greatest measure of compliance with law. To assist in these efforts, below, we provide a high-level summary of relevant laws, policy considerations, and best practices. We recommend you direct state specific inquiries directly to your Seyfarth lawyer of choice.
The Legal Landscape
Under the Fair Labor Standards Act (“FLSA”), there is no direct expense reimbursement requirement. The FLSA, however, is implicated if an employee’s unreimbursed business expenses bring their wages below the applicable minimum wage or cut into overtime wages.
Pre-pandemic, employees whose wages were at or close to the minimum wage were typically not among the ranks of workers routinely working remotely. As a result, many employers may be facing the interplay of remote working expenses with the minimum wage for the first time. Under this “new normal,” employers must be mindful of the expenses these workers might be incurring; in particular, with respect to one-time higher ticket purchases that could drop them below minimum wage, such as a printer or other home office equipment that is necessary for their job (more to come on the critical modifier “necessary”).
At the state and local level, there are currently 10 jurisdictions that have statutes or case law specifically addressing an employer’s requirement to reimburse business expenses, generally: California, Iowa, Illinois, Massachusetts, Montana, New Hampshire, North Dakota, South Dakota, District of Columbia, and Seattle, Washington. Another 14 states have statutes addressing an employer’s obligation to reimburse for the expense of tools and equipment that might come into play: Colorado, Indiana, Kansas, Maine, Nebraska, North Carolina, Michigan, Minnesota, North Carolina, Oregon, Tennessee, Vermont, Virginia, and Wyoming. Still other states require an employer to reimburse employees in a manner consistent with its written policies.
These states vary widely regarding what expenses must be reimbursed. By way of example, some of these states—notably California and Illinois—have strict reimbursement laws. As explained below, reimbursement might be required in these states for business-related use even if the employee will not incur an extra expense, such as when an employee has an unlimited amount of data and minutes on their cell phone. In that instance, even if there is no additional cost to the employee, the employer must reimburse so as not to enjoy a “windfall,” some courts have reasoned.
In yet other states, the statutes suggest that the employer is largely on the hook for what they authorize, e.g., explicitly or via a written policy. And in other states still, employers are obligated by statute only to reimburse for losses suffered that fall outside of “ordinary risks” of the business in which he is employed. Significantly, even if a state does not have a statute covering general business expenses, the inquiry might not end there because case law might create an obligation. While state law cannot be characterized as “uniform” across states, below are some key components to consider when revisiting any such obligation under these state laws.
But, Is It Really Necessary?
One of the key components of the most onerous expense reimbursement laws is the requirement to reimburse for any necessary expense, which begs many a question about what types of expenses must be reimbursed. Internet service and cell phone data are the most commonly considered, but what about printers and paper? Some employees might prefer to print out documents, but does the job actually require it? A ring light might be nice for all those Zoom meetings, but is it necessary?
While the question of necessity will turn on the specific job at issue, it is imperative that employers set clear expectations for what tools they require for an employee’s home office and what is not needed to do the job. Employers, of course, want to ensure employees working from home have a workspace that is safe and productive. But they must also be mindful that the more requirements they put in place for minimum home office standards—such as minimum WiFi bandwidth, a room with a door to ensure confidentiality of calls, locking filing cabinets—the more likely an expense incurred in complying with those standards is to be considered necessary.
Another component of assessing whether an incurred expense was necessary is whether the employee could have fulfilled the need at a lower cost. Maybe a webcam is necessary due to the manager’s expectation for regular video meetings, but does it have to be the state-of-the-art model or would a less expensive option suffice? Setting expectations in written policies with guidelines and procedures for advance approval of such purchases will allow the employer to define the universe of necessary expenses.
Employers should also consider whether it is more cost-effective to provide equipment, cell service or Wifi service, or other necessary equipment directly than to reimburse. Often, employers have bulk discounts or stock on hand at the office that can be shipped to an employee’s home at a lower cost.
Was the Expense Actually Incurred?
It seems straightforward enough that only those expenses actually incurred must be reimbursed, but this question is not always so simple. This is particularly true in certain states with respect to “mixed use” items that an employee uses for both business and personal reasons, such as a cell phone data plan or home internet. Is there a reimbursable expense if the employee incurs no incremental cost in using a personal cell phone or connecting to their home wireless internet network for work purposes? The answer likely depends on where the employee is located.
In California, for example, the statutory language requires employers to reimburse for “all necessary expenditures or losses incurred by the employee in direct consequence of the discharge of the employee’s duties” or at the direction of the employer. While that might sound like only those costs that would not have been incurred but for work, that is not how the statute has been interpreted. Quite the contrary, courts in the Golden State interpret this to require reimbursement of a “reasonable percentage” of employee’s monthly cellular data and internet costs even if the employee had unlimited data plans and home internet network for personal use and even if the employee’s monthly bills did not increase as a result of the business use.
In Illinois, although there is similar statutory language requiring reimbursement of “necessary expenditures” there is additional helpful language in the law that allows employers to set parameters on how much they will contribute toward such expenses (so long as it is not “de minimus”).
There are a variety of ways employers can fulfill their obligations to reimburse business expenses.
A common approach is to provide a fixed monthly stipend based on a good faith and reasonable estimate of an employee’s reimbursable expenses. This approach will usually cover the vast majority of expenses but it should nevertheless be coupled with a process by which employees can seek reimbursement of additional expenses that were not covered by the stipend. Also, we advise that employers maintain documentation to support the reasonableness of the stipend that they establish, in case the amount of the stipend is ever attacked as being too little (such that it does not cover an employer’s full reimbursement obligation) or too much (such that the excess should be treated as compensation for work rather than reimbursement).
Alternatively, employers can establish a process by which employees are only reimbursed after submitting a receipt or other documentation confirming that they indeed incurred the expense. There could also be some tools and equipment that the employer can provide in a more cost-effective manner if it purchases them directly.
Regardless of the specific avenue for ensuring the employer does not improperly shift business expenses to its employees, all employers should be aware of their obligations to reimburse and review and update their expense reimbursement policies to take into account the applicable law and the expenses their newly-expanded remote workforce might incur. The policy should clearly articulate the employer’s expectations for the tools and equipment that are necessary to do the job from home, and establish guardrails for when and how employees can purchase equipment with the expectation that the company will foot the bill.