Most employers reimburse their employees for money spent on meals, hotels and other expenses during work trips as business expenses, but few have given thought to reimbursing employees for employee costs incurred at home, including for internet, electricity, printer ink, etc., because those have traditionally been considered personal expenses. Employers who are requiring their workforces to remain remote in response to the COVID-19 pandemic should revisit their business expense policies, if they have not so already.
Under the Fair Labor Standards Act (“FLSA”), employees are entitled to reimbursement of expenses paid for the benefit of their employer if that expense would bring an employee’s earnings below the federal minimum wage. Many states, such as California, Illinois, Pennsylvania, Montana, Iowa, and New Hampshire, impose other expense reimbursement requirements on employers as well. For example, California requires that employees be reimbursed for all “necessary expenditures or losses incurred by the employee in direct consequence or discharge of his or her duties.”
Now that many workforces are fully remote, expenses that could previously considered “personal” in nature may now be considered business expenses, at least in part, to the extent that the employer derives benefits from those expenses. Depending on the circumstances, this may include office supply expenses (e.g., pencils, paper, ink, printers, etc.), utilities (e.g., internet, phone), or any other expenses required by the employer during a remote work period.
To the extent that any covered expenses are reimbursed pursuant to an “accountable plan” (as defined by the IRS), the amounts are not treated as wages and are not subject to income, social security, Medicare or unemployment taxes. To be an accountable plan, an employer’s reimbursement arrangement must comply with the following: (1) the expenses must have a business connection, (2) the expenses must be substantiated within a reasonable period, and (3) any amounts reimbursed in excess of substantiated expenses must be returned to the employer within a reasonable period.
Employers should consider whether they need to implement a new or revised business expense reimbursement policy to account for these new pools of business expenses or ensure compliance with the IRS accountable plan rules. If a policy is implemented, it is important for the policy to clearly indicate what home expenses will and will not be covered and to indicate what conditions employees must meet in order to be eligible for cost reimbursement. Employers should also consider whether to include an audit procedure or disciplinary actions for policy abuse or violation.