Reimbursing employees for job-related expenses has become a hot-button issue with so many employees working remotely and even on-site employees communicating with their employers by way of their personal cell phones. The California Court of Appeal has recently reaffirmed (and some would say expanded) the right of California employees to be reimbursed for job-related expenses.
California has long required that employers reimburse employees for necessary expenses they incur in doing their jobs. Although recodified and amended several times, the obligation has existed in California law since 1872. Despite its longevity, the significance of the obligation dramatically changed with the advent of computers and cell phones – and lately, with the prevalence of employees working remotely. On July 11, 2023, the California Court of Appeal addressed the issue of remote working during the COVID-19 pandemic and ruled that the government-mandated shutdown did not create an exception to Labor Code Section 2802: remote workers must be reimbursed for the necessary expenses they incur in order to perform their work duties, regardless of who mandates the remote working.
In Thai v. International Business Machines Corporation, Paul Thai sued his former employer, IBM, claiming that he and other California employees should be reimbursed for the cost of, among other things, internet access, telephone service, a telephone headset, and a computer and accessories when they worked remotely in 2020. IBM resisted, claiming that reimbursement was not required because the expenses resulted from a mandate of the government (i.e., stay-at-home orders) and not of IBM. The Court rejected IBM's argument, observing that "the obligation [to reimburse] does not turn on whether the employer's order was the proximate cause of the expenses; it turns on whether the expenses were actually due to performance of the employee's duties." Quoting legislative history, the Court noted that "Section 2802 is designed to prevent employers from passing their operating expenses on to their employees." The Court distinguished expenditures like those Thai claimed from expenditures on personal protective equipment (PPE) because PPE was generally usable and was required in a variety of settings and was not an "operating expense" of the employer.
The IBM decision is a stark reminder that the law does not consider whether the employer requires or even requests the expenditure. Instead, employers must reimburse employees for any expenditure that is required in order for them to perform their job responsibilities.
FAQ for Employers
Here are answers to some of the frequently asked questions about the reimbursement obligation under California law.
Q: Must employers reimburse an employee for home office expenses if the employee chooses to work from home rather than going into the office?
A: No. Section 2802 requires only that expenses that are necessary to perform job duties be reimbursed. If an employee has a choice of working remotely or working at an on-site location where the employer provides all necessary equipment, then remote-working expenses are not necessary to perform job duties and need not be reimbursed.
Q: Must employers reimburse independent contractors for their expenses?
A: No. The law covers only employees and not properly classified independent contractors or consultants.
Q: Do exempt employees have to be reimbursed for their expenses?
A: Yes. Both exempt and non-exempt employees are covered by Section 2802.
Q: Can employers require that employees have approval before an expense is incurred? That reimbursement requests be made within a certain period of time? That receipts be provided?
A: Yes. It is fine and it is common for employers to have policies that establish expense restrictions and reimbursement processes such as these. As with any other lawful policy, expense reimbursement policies can be enforced with discipline – even termination of employment. However, an employee's failure to follow the policy does not relieve the employer of the obligation to reimburse the employee. If the expense was necessary and incurred, it must be reimbursed.
Q: When the employee uses personal equipment, like an automobile or cell phone, for both personal and business purposes, how much must be reimbursed?
A: In this situation, a reasonable allocation of the cost of business vs. personal use must be determined. For automobiles, reimbursement for business mileage at the IRS rate will suffice. For other expenses, like cell phones and internet, employers must reimburse a "reasonable percentage" of the employee's cost. There is no formula or one-size-fits-all answer. The best course is to determine a generalized reasonable percentage and pay employees that amount, but advise employees (repeatedly) that if the amount is inadequate, they should report it to their supervisor or HR.
Q: Must reimbursement be made by the employee's last day of employment?
A: No. Reimbursed expenses are not wages and are not subject to the same requirements. However, reimbursement must be made as soon as reasonably possible following the employer's knowledge of the expenditure.
California's wage/hour laws are some of the strictest in the nation. Like it or not, these laws apply to any employee who works in the State of California regardless of where the company is incorporated or headquartered or where the employee's supervisor or HR is located. The adage that "ignorance is no excuse" unquestionably pertains. Compliance with wage/hour laws can be costly but not nearly as costly as failure to comply. Savvy employers understand this and assure both knowledge of and compliance with these laws. If we can help, let us know.