A Refresher on California Reimbursement Requirements in a COVID-19 World
Imagine that after weeks of working remotely due to COVID-19, you return to your office only to discover a stack of papers on your desk in a folder titled “requests for reimbursement.” You peer through the contents and find cell phone bills, a receipt for a $750 printer, a bank statement with the account fees highlighted, a clothing store shipping invoice with $49.95 of expedited shipping, a receipt for a 50” television, and a screenshot of a mobile payment service request with an electric plug emoji from a username you have never seen before. Why are these documents on your desk and what do you have to do as an employer?
California Labor Code § 2802 (“Section 2802”) requires employers to reimburse California employees for “all necessary business expenditures or losses incurred by the employee in direct consequence of the discharge of his or her duties.” Its purpose is to prevent employers from passing their operating expenses to their employees. However, Section 2802 only requires reimbursement for “necessary” and “reasonable” costs incurred by the employee as a condition of continued employment. Previously, many employers allowed remote working as a convenience for their employees. Because working remotely was not required, many employers could decline “work from home” reimbursements because the employee’s expenses were voluntary (i.e. the employee chose to work remotely). However, COVID-19 and the resulting shelter-in-place orders have redefined the working landscape, requiring many employees to work remotely to keep businesses afloat.
To determine whether (and what) the employer is obligated to pay, there are several factors to consider:
1. Who is submitting the receipt?
The California Labor Code – and, consequently, Section 2802 – only applies to employees. Thus, the first step of any Section 2802 analysis is to ask who is submitting the request. If the employee’s roommate demands payment from the employer for the increased electric bill, the employer would not be obligated to honor that demand: The roommate is not the employee. If, however, the employee demands payment for the increased electric bill they share with their roommate, the employer may have an obligation to pay. Note, too, that the definition of “employee” in California is incredibly broad. Under California’s new AB5 regime, many individuals previously operating as independent contractors may now be deemed employees.
2. What is the receipt?
Commerce today takes many forms. Receipts are no different. Employers should be open-minded when it comes to documentation of a requested reimbursement. At minimum, the accompanying documents should substantiate the purchase date, the item that was purchased, the purchase amount, and that the employee (or someone on the employee’s behalf) purchased the item. This could result in the submission of multiple documents: An employee could submit a shipping invoice and a copy of their credit card statement to show payment for new equipment. Reimbursement requests also could, conceivably, take the form of a screenshot from mobile payment services or electronic transfer platforms. Perhaps the employee has roommates, one of whom receives the electric bill and then requests a pro-rata share via a mobile transfer application. Employers should not dismiss a reimbursement request merely because it arrives in an unusual form.
3. What were the purchases reflected on the receipt?
Is it a work-related expense? An employer can likely decline a request to pay for an employee’s dog food in summary fashion. However, some usual or seemingly extravagant requests may require more thoughtful analysis. If the employee wants the employer to reimburse the cost of a 50” television because they can no longer watch sports in the break room, the employer can likely decline the request. If, however, that same employee regularly used a large television to run simulations necessary for the business and the employer expected those simulations to continue while the employee worked remotely, the request might not be so farfetched.
4. Is the reimbursement request necessary and reasonable?
Section 2802 only requires reimbursement of necessary and reasonable expenses incurred by the employee as a condition of continued employment. California has long held certain expenses, like cell phone bills and car mileage, as necessary and reasonable under certain circumstances. What constitutes “necessary and reasonable” will depend on multiple factors, including the employee’s job responsibilities (on paper and in practice), the employee’s performance expectations while working remotely, and the actual costs incurred by the employee.
An easy scenario to start: An employer switches meetings to a videoconference platform and requires employees to upgrade to a premium account (which charges a fee). The cost of the premium account would be reimbursable under Section 2802 as employers cannot pass their operating costs to their employees. If that same employee, however, purchased the latest, greatest desktop computer before being required to work remotely, she likely cannot submit a reimbursement for the desktop’s cost even though she must use it for work. She could, however, submit reimbursements for work-specific programs she was required to install on the device in order to fulfill her job duties. Similarly, if the employer had a practice of issuing live paychecks before the shelter-in-place period, the employee could recover the fees for setting up a bank account with direct deposit through Section 2802 if that became a condition of continued employment.
What about an accountant demanding a printer? The accountant may need a printer, but not the same $750 high-resolution color printer used by a marketing director to print prospective client handouts. Similarly, employees working remotely will need devices to work from – a laptop, desktop, tablet, etc. While most employees could work from a laptop, there are certain employees who may require more. Convenience, by itself, is insufficient to trigger a reimbursement obligation. Be careful, though, about delving too deeply into the “reasonableness” of a particular necessary item. While a court ultimately may agree that the amount was unreasonable, the language of Section 2802 requires reimbursement of all necessary expenses. That an item was “unreasonable” will not destroy the employee’s Section 2802 claim for a “necessary” expense; it will merely reduce the amount of their recovery.
What if the employee submitted a request for reimbursement for business casual clothing tops with an overnight shipping charge of $49.95? The employer’s likely, immediate reaction will be “that’s crazy,” but the manager remembers the employee used to manage the lawn maintenance business “in the field” and was asked to lead videoconferences with current and prospective customers the day after the issuance of the shelter-in-place order. The manager also recalls a conversation where the manager told that employee they’d never need to wear anything but t-shirts, jeans, and baseball caps to work in the field, while the employer also maintains a strict “business casual” policy applicable to anyone who interacts with clients. Suddenly, the request and the $49.95 in overnight shipping charge may not appear as crazy. While an employer has no obligation to reimburse for basic, non-uniform wardrobe items, the employer’s specific actions and expectations could give rise to a “necessary” business reimbursement.
Conversely, an employer has no obligation to reimburse voluntary or unnecessary costs. If an employee voluntarily enrolls in work-related classes to fill their leisure time, there is no requirement to reimburse the employee. Reimbursement would only be required if the classes were an employer-imposed requirement of continued employment. By the same token, if an employee submits delivery service receipts for their lunches, absent an employer policy promising meals under any circumstances, those lunches were voluntary and, thus, not reimbursable.
5. How much should the employer reimburse?
Items like a keyboard and mouse or a standing desk are fairly easy to calculate. But, what about expenses that an employee would incur irrespective of whether they work remotely? If the employee’s electric bill increased because they are now working remotely, is that reimbursable? Technically and conservatively, yes. However, an employer should only be responsible for a reasonable percentage of that bill. It may require comparing prior months’ bills to the current month to establish an amount “attributable” to the remote work. The same rationale applies to a personal cell phone or internet – if an employee must now use their personal cell phone or home internet for work (having no employer-paid alternative), a conservative approach would be to recognize the employer’s responsibility to reimburse for a reasonable percentage of the bill. However, courts would likely draw the line at reimbursement of fixed expenses, which the employee already had to pay before they had to work at home, such as the cable bill, as there was no “loss” to the employee as a condition of continued employment simply because the employee is working remotely.
Finally, the employer should be cautious about treading too deeply into the employee’s personal financial matters to understand the scope of a reimbursement. California places a high value on privacy and that hurdle is not lowered merely because there is a Section 2802 question. In this area, it is better to be conservative and over-estimate than underestimate and risk a privacy violation or a Section 2802 claim for failing to fully reimburse for actual expenses.
6. What does the reimbursement look like?
Generally, most employers provide reimbursement on a request-by-request basis. This makes sense because, in most cases, the expense is incurred once or very infrequently. If the employer anticipates that the expense will be incurred regularly, it could increase the employee’s salary or provide some other form of regular compensation. If employers take this approach, they must establish some means of identifying the portion of that compensation attached to the business expense, the calculation should be transparent, and the amount of the compensation must be sufficient to fully reimburse the employee for the expense actually incurred. Moreover, keep in mind that if the employer chooses to provide additional compensation to account for reimbursements, there will be tax implications, which could result in the employer failing to cover all of the cost of the intended reimbursement or the employee being penalized with higher payroll taxes to account for the “raise” in compensation to address the reimbursements.
Whatever method the employer chooses, make sure the reimbursement is timely to avoid falling afoul of other wage and hour laws. The best practice is to provide reimbursement within the next pay period following submission.
7. Can the employer keep the reimbursed item?
What happens if the employer paid for that necessary 50” television and the employee quits? Can the employer get it back? Technically, yes. As a practical matter, however, it may be difficult to retrieve company property from an individual’s home absent legal intervention or prior agreement to incentivize the employee to return the property. Reimbursement policies should require advance written authorization for purchases over a certain amount. For something like the 50” television, the employer should condition advance approval on the employee’s agreement to return the item upon the sooner of the employer’s demand or termination of employment.
8. Is there a cutoff date to submit reimbursements?
Generally, an employee may seek reimbursement of a necessary business expense within three years of incurring the expense. However, to lessen the risk of belated claims, employers should identify a deadline to submit reimbursements (i.e. 30 days after incurring the cost) in the written reimbursement policy. However, if a reimbursement is submitted after that date (but before the expiration of the three years), the best practice is to nonetheless accept the submission.
9. What if the employer did not know about the expense?
Courts differ on whether notice to the employer is required to establish liability for a Section 2802 claim. A conservative approach is to treat the duty to reimburse as separate from any notice requirement. Under this approach, whether the employer is aware of the reimbursement only plays a role insofar as the reasonableness of the reimbursement. That said, if the employer prevents or discourages its employees from requesting reimbursements, the fact that it did not receive a reimbursement will not absolve it of its Section 2802 obligations.
10. What are the consequences for failing to pay?
For any expenses that the employer does not fully reimburse, be prepared to substantiate the reasonableness of the reimbursement.
The failure to reimburse pursuant to Section 2802 exposes employers to individual or class litigation, Private Attorney Generals Act (“PAGA”) claims (and related penalties), statutory interest of 10%, and payment of the employees’ attorneys’ fees (which are never awarded to a prevailing employer), in addition to the amount that should have been reimbursed.
Further, employers cannot contract around their Section 2802 reimbursement obligations. Do not rely on policies or agreements that purport to waive the employee’s right to reimbursement of reasonable, necessary expenses as they will not stand.
11. What can I do to control the anticipated reimbursements?
Notwithstanding that shelter-in-place restrictions have been in place in California since mid-March, it is not too late to take control of reimbursements. Effective communication with employees is critical:
- Send reminders about expense reimbursement processes (or establish/communicate a process if one does not exist);
- Ensure any reimbursement policies require advance approval over a specific amount;
- Review job descriptions to anticipate likely reimbursements;
- Check with employees regarding devices they may need (or already have) to fulfill their job duties; and
- Identify someone to field employee questions.