What are the business-related expense-reimbursement requirements under California law?

Under California Labor Code Section 2802, an employee is entitled to be reimbursed by his or her employer "for all necessary expenditures or losses incurred by the employee in direct consequence of the discharge of his or her duties, or of his or her obedience to the directions of the employer." Thus, California employees have an explicit right to be reimbursed for business-related expenses, such as equipment, materials, training, business travel and uniforms.

Labor Code Section 2802.1, effective Jan. 1, 2021, requires general acute care hospitals to reimburse applicants for employment or employees providing direct patient care for required education and training costs. Examples of such costs include residencies, orientations or competency validations necessary for direct patient care employment, but do not include license, registration or certification costs, or education or training that an individual takes voluntarily.

Employers may implement policies and procedures regarding expense-reimbursement requests; however, according to a U.S. District Court for the Northern District of California (Stuart v. RadioShack Corporation), even if an employee does not submit an expense report in accordance with company policy, an employer must nonetheless reimburse the employee. Moreover, the court ruled that if the employer knows or has reason to know that an expense was incurred, the employer is obligated to reimburse work-related expenses even if an employee doesn't make a formal request to be reimbursed.

Unlike the rules for payment of final wages, reimbursable expenses that otherwise would not have been paid out on or before an employee's last day of employment do not need to be included in the final paycheck. Reimbursable expenses may be paid out on their regularly scheduled date regardless of the employee's termination date. This holds true even if an employee failed to submit an expense report in accordance with company policy.

Examples of common business-related expenses include:

Use of Employee's Personal Vehicle

When an employee is required to use his or her personal vehicle for work-related activities, the employer must reimburse the employee for expenses related to the use of the vehicle.

Although the mileage reimbursement method is common practice for reimbursing employees, the California Supreme Court ruled in the case of Gattuso v. Harte-Hank Shoppers that an employer may use any of the following methods to reimburse employees for expenses incurred in the course of their employment duties:

• Actual-expense method: Automobile expenses that the employee actually and necessarily incurred are calculated and then paid separately. Although this method may be more accurate, it also requires employers to maintain detailed records of the various expenses incurred by the employee, such as gas, insurance, depreciation and repairs.
• Mileage reimbursement method: When an employer uses the mileage reimbursement method to determine the amount of reimbursement due, the employee keeps a record of the number of miles driven to perform job duties. The employee then submits this information to the employer, who multiplies the work-required miles driven by a predetermined amount that approximates the per-mile cost of owning and operating an automobile. The federal IRS rate, which is based on national average expenses, is a widely used and accepted mileage reimbursement rate. An employer may also set a rate less than the IRS rate as long as the rate is based on objective evidence reflecting the average cost in the geographic area where the work is performed.
• Lump-sum payment: The employee is paid a lump-sum amount sufficient to provide full reimbursement for actual expenses incurred. However, if an employee shows that the reimbursement amount is less than the actual expenses incurred, the employer must make up the difference. With this method, an employer can further satisfy its statutory business-expense reimbursement obligation by paying employees enhanced compensation in the form of increases in base salary or commission rates, provided the employer establishes some means to identify the portion of overall compensation that is intended as expense reimbursement. The identified expense amount must be separately identified on the employee's wage statement. 

Whichever method an employer chooses, if an employee can show that the reimbursement provided, even the IRS mileage rate, does not cover the actual expenses incurred, the employer is required to pay the difference.

Use of Employer-Provided Vehicle

Employers that provide employees with vehicles for business-related purposes must reimburse the employees for all business-related expenses incurred with regard to employer-provided vehicles (e.g., gas, oil, lease payments, repairs, tires, vehicle depreciation, insurance).

Business-Related Travel

Employers must reimburse employees for costs associated with meals, lodging and other incidental expenses when employees are required to travel away from home on business. For meals and lodging, the employer has the option of reimbursing the actual costs or providing the employee with a per diem rate equivalent to the standard IRS per diem rate for the location of travel. If the employer chooses to use the IRS per diem rate, it must make the employee aware of this policy before the business travel. Failure to do so will result in the employer being required to reimburse the employee for the actual costs, even if greater than the IRS per diem rate. Tips and other incidental travel expenses must also be reimbursed.

Tools and Equipment

The Industrial Welfare Commission's wage orders require that employers provide employees with all the necessary tools and equipment required for them to perform their jobs. However, employers may require employees to supply their own hand tools when an employee earns at least twice the state minimum wage rate and when hand tools are routinely required by the employee's trade.

Uniforms

Employers requiring employees to wear uniforms are responsible for purchasing uniforms, as well as for paying for any related costs associated with maintaining and laundering said uniforms. Uniforms are defined to include apparel of distinct design or color. Distinctive design is further defined as traditional uniforms, such as those worn by police officers, as well as rugby shirts and floral Hawaiian-style shirts or any clothing of a specific color, even if the clothes do not contain any company logos or are not of a specific design. Maintenance of uniforms beyond normal machine washing and drying, such as dry cleaning and pressing, must also be covered by the employer.

Cellphones  

A California court has held that employers must reimburse employees when they are required to use their personal cellphones for work. If the actual cost of an employee's cellphone use for work cannot be determined—for example, if an employee has an unlimited minutes/texting plan—the employer is required to reimburse the employee for a "reasonable percentage" of the personal cellphone bill.

Employers must maintain all records relating to employees' requests for expense reimbursements for a period of three years.