Employee Expense Reimbursement Explained (Full 2023 Guide)

Dimitri Gedevanishvili

Dimitri Gedevanishvili

Marketing Manager
business owner managing employee expenses

Expense reimbursement is an essential aspect of the employer-employee relationship that requires careful consideration and understanding. It involves reimbursing employees for expenses they incur while performing their duties, and it’s crucial for employers to understand their obligations in this area.

In this article, we’re going to explore what employee expense reimbursements look like, why they’re important, and how your company can properly implement an expense reimbursement process.

The What and Why of Expense Reimbursement

At the core, employee expense reimbursement is the practice of compensating employees for the expenses they incur while performing their job duties. This practice is especially prevalent in industries where employees often need to make work-related purchases, such as travel and accommodation, tools and equipment, mileage, or even personal devices like cell phones and laptops when used for work.

Related: Manual Expense Reports: The Hidden Costs

The primary reason for reimbursing employee expenses is quite straightforward: it’s both fair and legally required in many jurisdictions. If an employee has to spend their own money to perform their job, they should be compensated for it. Moreover, in many jurisdictions, failure to reimburse employee expenses could lead to legal implications.

For instance, in California, the obligation to reimburse business expenses incurred by employees is enshrined in the Labor Code section 2802. This law requires employers to “indemnify his or her employee for all necessary expenditures or losses incurred by the employee in direct consequence of the discharge of his or her duties.” In simpler terms, employers must reimburse employees for all necessary expenses incurred in the course of performing their job duties.

Expense Reimbursement Policies

To manage expense reimbursement effectively and efficiently, many employers implement policies that guide the process. These policies often require employees to submit reimbursement requests within a specific period and limit reimbursements to expenses approved by management.

However, it’s crucial for employers to understand that these policies cannot override legal requirements. In other words, the Labor Code requires reimbursement of legitimate business expenses, regardless of when the employee makes the request or whether management approved the expense.

If employees incur legitimate business expenses but do not comply with expense reimbursement policies, employers should typically address the non-compliance as a disciplinary issue rather than risk potential liability by refusing to reimburse the employee.

Related: Mileage Reimbursement Explained | How To Set Up A Mileage Reimbursement Policy For Your Business

The importance of understanding and correctly implementing expense reimbursement policies cannot be overstated. Missteps can lead to misunderstandings, dissatisfaction, and even lawsuits, as indicated by the California Court of Appeal’s decision in Cochran v. Schwan’s Home Service, Inc.

This case highlighted the broad obligation to reimburse employees for expenses incurred in the course of performing their jobs, extending to the use of personal cell phones for work-related calls.

Cochran v. Schwan’s Home Service, Inc.: A Case Study

The landmark case of Cochran v. Schwan’s Home Service, Inc. helps to illustrate the importance of a clear and comprehensive expense reimbursement policy. In this case, the plaintiff, Colin Cochran, sued his employer, Schwan’s Home Service, on behalf of customer service managers who were not reimbursed for the business use of their personal cell phones. According to Cochran, this failure to reimburse constituted a violation of Labor Code section 2802.

The California Court of Appeal agreed with Cochran, holding that employers must reimburse employees for the reasonable percentage of personal cell phone bills attributable to mandatory business use, even if the employees did not incur additional fees for such business use. The court stated, “If an employee is required to make work-related calls on a personal cell phone, then he or she is incurring an expense for purposes of section 2802.”

Implications of the Cochran Decision

The Cochran decision serves as a reminder of the broad obligation employers have to reimburse employees for expenses incurred in performing their duties. The case also underscores the importance of understanding the implications of technology in the workplace, particularly when personal devices are used for business purposes.

As technology continues to evolve, and the use of personal devices for work becomes more common, employers must keep abreast of such changes and update their policies accordingly. Employers should also ensure that their policies clearly communicate the process for requesting reimbursement, the types of expenses that are reimbursable, and any restrictions or limitations.

Related: Company Expense Approval Hierarchy Explained

Best Practices for Expense Reimbursement Policies

In light of the Cochran decision and the legal requirements for expense reimbursement, employers should consider the following best practices when developing and implementing their policies:

  • Clarity: The policy should clearly state what expenses are eligible for reimbursement, how to submit an expense for reimbursement, and the timeline for reimbursement. It should also be readily available to all employees.
  • Compliance: The policy should comply with all relevant laws and regulations. This might involve consulting with legal counsel to ensure the policy meets the requirements of Labor Code section 2802 and any other relevant laws.
  • Communication: The policy should be communicated to all employees, and employers should provide training on the policy. Regular reminders can help ensure that employees understand the policy and their rights.
  • Consistency: The policy should be applied consistently to all employees. This can help prevent misunderstandings and potential legal issues.
  • Consideration of Technology: In light of the Cochran decision, employers should consider the implications of technology use in their policies. This might involve determining how to calculate the reasonable percentage of personal cell phone bills attributable to mandatory business use, for example.

Employee Expense Reimbursement FAQ

As employers navigate the complexities of employee expense reimbursement, several questions and considerations often arise. Here are some common ones and their answers:

  1. What expenses should be reimbursed? Employers are generally required to reimburse all necessary expenses that an employee incurs in direct consequence of discharging their job duties. This includes the use of personal cell phones for work, mileage for using personal vehicles for business purposes, and purchasing supplies or equipment needed to perform their job.
  1. What if an employee does not submit an expense report? It is the responsibility of the employee to submit an expense report to request reimbursement. Employers should communicate to their employees the importance of timely submission of expense reports. However, if an employer knows or has reason to know that an employee has incurred a work-related expense, the employer should address the situation promptly even without a formal report.
  1. What can be done if an employer refuses to reimburse an expense? If an employer refuses to reimburse a legitimate work-related expense, the employee may have a legal claim for violation of Labor Code section 2802 or similar laws. The employee should consider seeking advice from a legal professional.
  1. How can employers handle expense reimbursement for remote employees? With the rise of remote work, this has become an increasingly common question. Employers should consider the nature of the work and what expenses are reasonably necessary for the employee to perform their job. This could include the cost of a home office setup, internet fees, or even increased utility bills.
  1. What is the impact of expense reimbursement on an employee’s wages? Expense reimbursements are not considered wages and are not subject to payroll taxes. However, if the reimbursement exceeds the actual expense incurred, the excess may be considered wages.

The Role of Technology in Expense Reimbursement

As technology continues to evolve, it plays an increasingly significant role in employee expense reimbursement. One area of growing importance is the use of expense management software. Such software can streamline the process of submitting, approving, and tracking expense reports, making it easier for both employees and employers.

Additionally, as the Cochran case illustrates, technology itself can be the source of expenses that need to be reimbursed. Employers need to consider how their policies address the use of personal devices for work, including how they calculate the proportion of use that should be reimbursed.

Furthermore, employers should be aware of the potential privacy implications when employees use personal devices for work. Employers may need to consider policies that balance the need to monitor business use for reimbursement purposes with respect for employee privacy.

In conclusion, employee expense reimbursement is a complex area that requires careful attention from employers. By keeping abreast of legal developments, understanding the implications of technology, and adhering to best practices, employers can foster a fair and effective approach to expense reimbursement.

The Challenge of Remote Work and Expense Reimbursement

The rise of remote work has added a layer of complexity to the issue of employee expense reimbursement. As many employees now perform their duties from home, new types of expenses have emerged that employers must consider. For example, many remote employees use their personal devices, internet connection, and home utilities to perform their work. These expenses may need to be reimbursed under laws like California’s Labor Code section 2802.

Related: How Employees Working From Home Deduct Their Mileage

However, determining what constitutes a necessary expense in the context of remote work can be challenging. For instance, should an employer reimburse a portion of an employee’s rent or mortgage if they use a part of their home as a dedicated office space? What about the costs of heating or cooling that space? These are questions that employers need to consider and address in their expense reimbursement policies.

Further, with employees working from different locations – sometimes even different countries – employers need to be aware of the different legal requirements regarding expense reimbursement in different jurisdictions. For instance, some states in the U.S. have specific laws governing expense reimbursement, while others follow the federal Fair Labor Standards Act (FLSA), which does not explicitly require employers to reimburse employees’ work-related expenses.

Best Practices for Managing Expense Reimbursement in Remote Work

Given these challenges, here are some best practices that employers can adopt:

  • Create clear policies: Employers should create clear and comprehensive expense reimbursement policies that take into account the unique circumstances of remote work. These policies should clearly define what expenses will be reimbursed and the process for seeking reimbursement.
  • Communicate effectively: Clear communication is key when it comes to expense reimbursement. Employers should ensure that all employees are aware of the expense reimbursement policy and understand how to submit expenses for reimbursement.
  • Regularly review and update policies: As the landscape of remote work continues to evolve, employers should regularly review and update their expense reimbursement policies to ensure they remain relevant and compliant with any changes in the law.
  • Consult legal advice: Given the complexity of the laws surrounding expense reimbursement, it’s wise for employers to seek legal advice when crafting their policies. This can help prevent potential disputes and legal issues down the line.

While remote work presents new challenges in the realm of employee expense reimbursement, these can be effectively managed with clear policies, effective communication, and the use of technology. As we navigate this new world of work, it’s important for employers to stay informed and adaptable, always striving for fairness and compliance in their expense reimbursement practices.

We hope this article proves useful to you and your team! To hear about how TripLog can help manage your team’s expenses with more features and affordability than any other solution, please schedule a call with our sales team!

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