Business Law Compliance/Best Practices Employment Law Legal Topics

Pay Me Back: Every Employer Should Have an Expense Reimbursement Policy

hotel_78056111You take a business trip and, of course, you want to be reimbursed for your expenses. California law backs you up. Employers: don’t get caught unaware—know the law and have a policy in place that complies with it.

California law requires that employers reimburse their employees for all expenses necessarily incurred in the course and scope of their employment. Lab C  §2802. This seems simple, but this provision is actually a common source of liability, particularly for companies with California employees that are headquartered out-of-state and may not be aware of the breadth of California’s expense reimbursement requirement.

Under California law, employers must reimburse employees for a wide range of expenses, including air travel, hotels, motels, meals, cab fare, rental vehicles, and the costs associated with operating a personal vehicle for business purposes.

Employers should not even think about asking an employee to give up the right to be reimbursed for necessary work expenses; it’s a right that can’t be waived!

Smart employers implement a written policy on expense reimbursement and make it known to all employees. The policy should include the following elements:

  • An affirmation of employees’ right to reimbursement for appropriate business expenses.
  • A requirement that expenditures over a specified sum be approved in advance to ensure that they are truly “necessary.”
  • A process for submitting and obtaining payment for reimbursable expenses and a requirement that they be submitted in a timely fashion.
  • Specific information about the type of documentation required for authentication of identified expenses.
  • A statement that any misrepresentation in connection with the expense reimbursement process will be grounds for discipline up to termination of employment.

Employers have a major interest in getting the documentation right. Employers may deduct certain expenses as a business expense for tax purposes under IRC §274 only if the employer meets certain requirements. To help ensure that reimbursed expenses are deductible for income tax purposes, the employer should consult the guidelines in Rev Proc 2009-47, 2009-42 Int Rev Bull 524, and request that employees provide records that substantiate their expenses in accordance with those guidelines.

To make sure that employers don’t get caught in the expense reimbursement trap for the unwary, CEB has the best practices for this workplace issue and many others, including sample policy provisions, in California Wage and Hour: Law and Litigation, chap 8.  Also check out CEB’s Drafting Employment Documents for California Employers, chap 3, on drafting employment contracts to cover this issue. Need to get more up to speed on wage and hour law? CEB’s program Essential Employment Law Issues: Wage and Hour Compliance helps attorneys learn what clients need to know to protect them against enforcement actions and employee lawsuits alike.

Related CEB blog posts:

© The Regents of the University of California, 2012. Unauthorized use and/or duplication of this material without express and written permission from this blog’s author and/or owner is strictly prohibited.

7 replies on “Pay Me Back: Every Employer Should Have an Expense Reimbursement Policy”

Please clarify the following.

You first state that, “California law requires that employers reimburse their employees for all expenses necessarily incurred in the course and scope of their employment. Lab C §2802” and, “Employers should not even think about asking an employee to give up the right to be reimbursed for necessary work expenses; it’s a right that can’t be waived!”

Then you state, “One way to ensure the deductibility of expenses is to provide in the employee’s contract that he or she will be reimbursed only on the submission of records that comply with the requirements of IRC §274.”

These seem to conflict each other.

Thanks very much for your comment and you make an excellent point. I have edited the blog post to clarify that an employer cannot make the employee’s right to reimbursement conditional in that way. Much appreciate your careful reading!

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