Tips for Reimbursing California Employees' Business Expenses

California employers must reimburse workers for reasonable business expenses. This issue may seem less significant than some California mandates—such as paid-time-off and additional leave requirements—but failing to properly reimburse employees for the expenses they incur can lead to class-action lawsuits. Here are some tips from California employment attorneys to help businesses stay compliant.

California law requires an employer to reimburse an employee for "all necessary expenditures or losses incurred by the employee" in carrying out job duties or employer directives.

[SHRM members-only HR Q&A: What are the business-related expense reimbursement requirements under California law?]

However, the statutory phrase "expenditures or losses incurred" is not as clear as it seems, said James Carter, an attorney with Jackson Lewis in Irvine. As an example, he pointed to a case in which a California appellate court held that an employee who was required to use his personal cellphone for work purposes was also entitled to reimbursement—even if he already had an unlimited plan and his cellphone bill didn't increase because of his work usage. 

Reasonable costs also include attorney's fees incurred by an employee who attempts to enforce his or her rights. "As such, there is a built-in incentive for plaintiffs' counsel to take these cases since there is a statutory right" to attorney's fees, said Michelle Lee Flores, an attorney with Cozen O'Connor in Los Angeles.

Personal Vehicles

California law in this area differs from federal law. The Fair Labor Standards Act (FLSA) doesn't require employers to reimburse for mileage or other vehicle expenses, but California law does. 

Flores said employers should note that even under the FLSA, an employee's earnings can't fall below the minimum wage. So an employer may be required to reimburse business expenses—even under federal law—if a worker's wage rate falls below the minimum wage after he or she pays out of pocket for business expenses.

"For obvious reasons, this concept would also apply to require reimbursement at the state level if failure to do so would reduce the employee's pay below the applicable state minimum wage," she added.

Employees commonly use their own vehicles to get to job sites, run work-related errands and meet with clients. California employers must reimburse employees for expenses incurred while using their personal vehicles for anything other than normal commuting. Covered expenses may include maintenance and repairs, fuel, insurance and registration, and depreciation, Carter explained.

Businesses frequently reimburse workers for personal-vehicle use at the established IRS rate.

Flores cautioned, however, that the IRS reimbursement rate might not always be adequate in California. The obligation to reimburse is for the actual "expenditures or losses incurred by the employee." 

Accordingly, employees who receive the IRS rate can argue that they are actually owed more. For example, Flores said, "if an employee has a very expensive car that gets poor gas mileage, the employee could argue that the IRS rate is not sufficient reimbursement for the actual expenditures or losses incurred when the employee used his or her own vehicle for company business," she said.

Carter noted that California law gives employees the right to challenge the adequacy of the employer's reimbursement calculation, regardless of whether the employer uses a lump-sum, mileage-basis or actual expense method for reimbursement.

Limits on Reimbursement

So are there limits on what an employer needs to reimburse in California? The law states that "all necessary expenditures or losses" must be reimbursed.

"As such, it requires reimbursement for the actual costs incurred, but it still has a 'necessary' component to it," Flores said. "This has allowed employers to apply a common sense approach or limit to determine what is 'necessary'—which case law has deemed depends on whether the employee made reasonable choices."

Carter noted that lodging at five-star hotels when more modest accommodations would do probably would not be considered necessary or reasonable—as long as the employer did not direct the employee to stay at such places.

In certain circumstances, employers are not required to reimburse for hand tools, personal equipment or generic uniforms, Carter noted.

"Employer limits, however, should be reasonable and communicated in writing and in advance," he added.

An employer's policy can require preapproval for expenses to help determine what is "necessary," but there is a legal risk for the employer if it refuses to provide payment based solely on an employee's failure to obtain preapproval, Flores said.

Under these circumstances, a less-risky practice would be to provide payment to the employee in order to comply with the employer's obligation to reimburse for such expenses and then also counsel or discipline the employee for failing to follow company policy, she said.

HR's Role

Carter and Flores both said it is a good idea to consult experienced employment counsel when developing policies and procedures for expense reimbursement—particularly for multistate businesses.  

"It is quite likely that the employer can treat all of its employees—with the exception of those in California—the same regarding reimbursement," Flores said. "As such, a separate policy for California employees could be drafted that explains that, based on state law, the company will reimburse certain expenses" as stated in the policy.

She added that any written policy should contain a catch-all provision stating that, to the extent federal or applicable state law requires some additional reimbursement, the company will comply with such laws. 

Carter said multistate employers could alternatively opt to establish a California-compliant expense reimbursement policy and apply it to all its employees throughout the country. "This would bring the added benefit of compliance for situations in which non-California employees travel to and incur necessary expenses in California, where they're entitled to California employee protection," he said.

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