Must Employees Be Reimbursed for Expenses Incurred While Working? Some Surprising Information.
When employees have expenses that are related to the execution of their duties, a frequent question we receive from employers is, “do they have to be reimbursed?” The answer, as usual, is “it depends.” Employers must consider both federal and state law when determining their reimbursement obligations.
Under federal law, employers are not required to reimburse employees for expenses they incur. However, when employers do reimburse employees when they incur expenses on the employer’s behalf (or where they are required to expend sums solely by reason of action taken for the convenience of employer), there are laws that govern how those reimbursements are treated.
In accordance with 29 CFR 778.217, “such reimbursement payments are not included in the calculation of the employee’s regular rate of pay and is not considered compensation for services rendered by the employee. Employees who are not reimbursed for expenses incurred on the job can deduct those expenses on their personal tax return.” Visit https://www.gpo.gov/fdsys/pkg/CFR-2017-title29-vol3/pdf/CFR-2017-title29-vol3-sec778-217.pdf to review 29 CFR 778.217 in more detail.
Federal law does not require that employers reimburse an employee for mileage. However, when employees drive for business purposes, the employer must ensure that they do not incur expenses that drop their pay below minimum wage. When considering reimbursing employees’ mileage, even though not required by federal law, there are several items to consider. Since it is not required, there is no specific amount that must be reimbursed. Many employers that do, use the IRS standard mileage business rate. And if they choose to reimburse above the IRS standard rate, the amount exceeding the IRS standard rate must be recorded as taxable income to the employee. On the flip side, should an employer reimburse below the IRS standard rate, the employee can take the difference as a personal tax return deduction.
However, there are some states that DO require reimbursement. California has for some time, while Illinois recently passed legislation mandating expense reimbursement.
California law, Labor Code Section 2802 requires reimbursement of expenses to employees. The law states “employees shall be reimbursed by their employer 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." Employers in California may implement policies to place limits on travel expenses, but they are obligated to reimburse. Should a California employer have a policy stating employees must submit for reimbursement within a particular time frame, the employer is still obligated to reimburse - even if the employee did not comply with the policy’s time constraint. In such cases, the employer may use discipline to encourage employee participation in the future.
Labor Code Section 2802 may be found at: https://leginfo.legislature.ca.gov/faces/codes_displaySection.xhtml?sectionNum=2802.&lawCode=LAB
The Illinois statute regarding reimbursement was signed into law in August and will be effective January 1, 2019. This law is an amendment to the Illinois Wage Payment and Collection Act. It requires reimbursement for “all necessary expenditures or losses incurred by [employees],” and defines necessary expenditures as “reasonable expenditures or losses required of the employee in the discharge of his or her employment duties and which [primarily] benefit the employer.”
Again, as in California, employers in Illinois implement policies that govern what type(s) of expenses are reimbursable and limits, as well as spending limits. For example, the policy may exclude items such as alcohol from company business travelers. The employee could have a glass of wine with dinner if wanted, but would only be reimbursed for the food, not the wine. The company may also limit the amount the employee would be reimbursed for meals, for example, $10 for breakfast, $15 for lunch and $25 for dinner. If the employee chooses to spend more, they would be responsible for the additional expense. Such provisions are typically found in employer policies regarding expense reimbursement, even in states where reimbursement is not required by law. If the employee were to spend more, they would be responsible for the additional expense.
The Illinois Wage Payment and Collection Act can be found at:
With the California law and the recent passage of the law in Illinois, it is likely we will see other states following suit and passing similar legislation. It is important to keep current with state laws and ensure compliance with those applicable.