Employers commonly reimburse expenses incurred by employees in the course of their employment, but many employers do not fully understand their obligations with respect to the reimbursement of business expenses. In light of the California Court of Appeal’s decision last year in Cochran v. Schwan’s Home Service, Inc., expense reimbursement practices are likely to be subjected to increased scrutiny in the future, so understanding the law governing expense reimbursements can reduce employers’ risk of liability.
The obligation to reimburse business expenses incurred by employees originates in California Labor Code section 2802, which requires an employer 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 . . . ." Simply stated, the statute requires employers to reimburse employees for all necessary expenses incurred in the course of performing their job duties.
In an understandable effort to control expenses and process them efficiently, many employers maintain expense reimbursement policies that require employees to submit reimbursement requests and within a defined period of time, or limit reimbursement to expenses that were approved by management. The Labor Code requires reimbursement of legitimate business expenses without regard to the timing of the employee’s request or the existence of management approval, however. To the extent that employees incur legitimate business expenses but do not comply with expense reimbursement policies, employers should generally address the non-compliance as a disciplinary issue, rather than expose themselves to potential liability by refusing to reimburse the employee.
As the Cochran decision indicates, the obligation to reimburse employees for expenses incurred in the course of performing their jobs is quite broad. In Cochran, the Court of Appeal concluded that "[i]f an employee is required to make work-related calls on a personal cell phone, then he or she is incurring an expense for the purposes of section 2802." The logic underlying the Cochran decision is not limited to reimbursement of cell phone charges, however. Prudent employers should consider whether their employees are required to use other personal devices or resources to perform their jobs. Some employees, for instance, are required to use their own tablets, laptop computers, home computers (and Internet service), and other tools or equipment in carrying out their duties. The Cochran decision suggests strongly that employers are obligated to reimburse such employees for at least a portion of the cost associated with their use of these personal resources. Employers should consider whether employees need to use particular equipment or services in carrying out their duties and, if so, employers should decide whether to provide the equipment to the employee at the employer’s expense or reimburse the employee for the use of the item (or service). Employers should also consider whether to prohibit the use of personal equipment and services in order to avoid potential claims for reimbursement.
What should employers do now?
- Do not deny reimbursement of otherwise valid business expenses due to non-compliance with internal policies - When confronted with requests for the reimbursement of valid business expenses that are not submitted in accordance with company policy, employers should generally reimburse the expense as required by law and treat the policy violation as a disciplinary matter, rather than a justification for denying reimbursement.
- Consider the implications of the Cochran decision and act accordingly - Employers should identify the resources necessary to perform existing jobs (potentially including cell phones, home computers, and home Internet access) and determine whether they will provide those resources to employees or reimburse employees for providing the resources themselves. Employers who elect to provide the resources should consider adopting policies that prohibit the use of personal property and resources when company resources are provided.