Q&A: Reimbursing employee expenses can be necessary

Question: Do we have to reimburse employees for expenses, and if so, which ones?

Answer: Yes, there are times when employees must be reimbursed for expenses, but it depends on the expense you’re talking about and whether you’re dealing with less generous federal law or more generous state or local law.

Under federal law, employers must reimburse nonexempt (overtime-eligible) employees for costs incurred in the course of the employee’s work that are primarily for the benefit or convenience of the employer and that would reduce the employee’s pay below minimum wage. The U.S. Department of Labor (DOL) has said that mandatory tools for a trade, required uniforms, and required use of personal vehicles are all costs that can’t reduce nonexempt employees’ pay below minimum wage. To ensure this doesn’t happen, you can reimburse the actual costs (such as the costs of ownership for a vehicle like a work truck that’s primarily used for work or the cost of an arc welder used mainly for work), or a reasonable approximation (such as the Internal Revenue Service’s standard mileage rates for the use of a personal vehicle for work). (See DOL opinion letter FLSA2020-12.)

In California, Montana, and some local jurisdictions like Seattle, the bar is higher. All employees in these locations must be reimbursed for any expenses they incur in discharging their duties, regardless of any impact on minimum wage levels. For example, employers are responsible for providing or reimbursing all employees for required uniforms, work-related use of a personal vehicle (other than commuting between home and work), and tools needed on the job. See California Labor Code 2802, Montana Code Annotated 32-2-701, and Seattle Municipal Code 14.20.010. Also see our newsletter articles on two court decisions in California: “CALIFORNIA: Employers must reimburse employees for travel expenses” (01/11/2018) and “CALIFORNIA: Reimbursement for business use of personal phones is a must” (08/28/2014).

Under federal law, the expenses identified by the DOL as needing to be reimbursed if they would cause nonexempt employees’ wages to fall below the minimum wage are easy to address – they must be reimbursed. Business-related use of personal cell phones, home internet, and home offices are more difficult. The keys in analyzing those expenses are whether the employee is nonexempt (overtime-eligible), whether it’s clear the expense was primarily incurred for your benefit, and whether failing to reimburse the nonexempt employee would result in them getting less than minimum wage. When in doubt, most employers will consider opting for reimbursing actual costs or set a reasonable flat amount to mitigate risk and provide administrative simplicity.

In California, Montana, and some local jurisdictions like Seattle, any expenses that are incurred by the employee in order to do their job must be reimbursed. This means that employers in these areas should default to reimbursing all necessary business-related expenses discussed here, regardless of whether the employee is eligible for overtime.

If you have specific questions about a situation, be sure to connect with your Vigilant Law Group employment attorney. Check out our Model Form, Expense Report, if you’re looking for a basic form to document employee reimbursements, and our Model Form, Telecommuting Agreement, for a sample to memorialize your remote work arrangements.