California Law Addresses Employee Business Expense Reimbursement
While not mandatory in every state, California employers are required to reimburse their employees for reasonable business expenses. This means employers must pay back employees who spend their own money for business-related expenses. Various California labor and tax laws outline the types of reimbursable expenses.
California Labor Laws on Employee Expenses
California Labor Code Section 2802 states an employer shall indemnify his/her employee for all necessary expenditures or losses incurred by the employee in the direct consequence of the discharge of his/her duties. It does not specify what amounts are specifically necessary.
The most common examples are mileage, travel, and dining expenses. Reimbursable expenses often occur when employees travel for work. The need to purchase work-related supplies or tools is also common. The business expenses are expected to be reasonable. For example, employers can require that hotel and food costs be contained at a certain amount, and airfare be coach versus first class.
The test for recovery under Section 2802 is whether the expense or loss was incurred “within the course and scope of employment.” In determining whether, for purposes of indemnification, an employee’s acts were performed within the course and scope of employment, the courts have held that an employer is vicariously liable for risks broadly incidental to the enterprise.
What Are Typical Employee Reimbursements?
One of the most common employee expenses relates to driving and travel, like mileage reimbursement. In December 2018, the Internal Revenue Service issued the 2019 optional standard mileage rates. These rates calculate the deductible costs of operating an automobile for business, charitable, medical or moving purposes.
Beginning on Jan. 1, 2019, the standard mileage rates for the use of a car (also vans, pickups or panel trucks) are:
- 58 cents per mile driven for business use,
- 20 cents per mile driven for medical or moving purposes, and
- 14 cents per mile driven in service of charitable organizations.
The business mileage rate increased 3.5 cents for business travel driven and 2 cents for medical and certain moving expenses from the prior year’s rates in 2018. The charitable rate is set by statute and remains unchanged. These mileage rates may change biannually (in January and July of each year) so employers should check the optional standard mileage rates by visiting the IRS website.
Required cell phone use has also become more common. A California court of appeal ruled that an employer must reimburse an employee if the employee is required to use a personal cell phone to make work-related calls.
By way of example, even when an employee does not incur an extra expense by making work calls because he/she had an unlimited data plan, the employer is still required to reimburse the employee. The appellate court ruled that “reimbursement is always required,” and the employer must pay “some reasonable percentage” of the employee’s cell phone bill to comply with the Labor Code.
Another regularly reimbursable expense is training and education. If the employer requires the employee to undergo a training course, the employer must generally reimburse the employee for the cost of the course.
Some jobs require a specific type of license to legally practice in that field, such as real estate agents, cosmetologists, registered nurses and attorneys. The Division of Labor Standards Enforcement (DLSE) distinguishes between training costs required by law, such as a license required by the state, versus employer-required training.
According to the DLSE:
- There is generally no requirement that an employer pay for training leading to licensure or the cost of licensure for an employee.
- If the license is required by the state or locality as a result of public policy, the employee bears the cost of licensing.
- If the license (or training) is not actually required by statute or ordinance but the employer requires the training and/or licensing simply as a requirement of employment, the employer must reimburse the employee for the cost.
Does your Business have a Reimbursement Plan in Place?
Page 15 of IRS Publication 15, (Circular E), Employer’s Tax Guide, states that expense reimbursements do not have to be included in an employee’s wages if the business has an “accountable” plan.
In order to have an accountable plan, an expense reimbursement policy or advance payment program must meet the following three conditions:
- Business connection: The expense must occur in the performance of services as an employee of the employer.
- Substantiation: The employee must substantiate his or her business expenses by providing the employer with evidence of the amount, time, place, and business purpose of the expense. The employee also must submit business expenses within a reasonable period of time after they occurred.
- Returning excess amounts: If any amounts the employer pays to the employee exceed the amounts the employee spent, the employee must return excess amounts to the employer within a reasonable period of time.
Section 2902’s statute of limitations governing the submission of expenses is up to four years, but most employers prefer a much shorter time period for submission of costs. It’s thus recommended to incorporate a policy regarding when expense reports should be submitted. Once a month is the typical standard. It is relevant to note that an even if an employee submits a late business expense report, legally, he/she is still entitled to reimbursement up to the statute of limitations period. When the business expense may exceed the statute of limitations period, the employer should still consult an attorney before denying reimbursement.
The policies should also indicate the turnaround time for when employees can expect their expenses to be paid. Because employee expenses are not wages, there is not a statutory requirement for reimbursing within a specific time period. Although, the employer should not delay this process. Both employer and employee should adhere to strict guidelines for submitting and reimbursing employee business expenses to avoid conflict. If you need help creating an employee reimbursement plan for your company, let us know!