Preventable Employee Expense Reimbursement Missteps

Yesterday, attorney Julia Melnicoe explained some of the most common—and dangerous—wage and hour myths and misconceptions that California employers fall prey to. Today, the rest of the list—plus an introduction to a webinar next week you won’t want to miss.

Melnicoe is an attorney at the San Francisco office of Sedgwick LLP.

For #s 1-6, click here.

7. Ignoring travel time. Under state and federal law, ordinary commuting time between home and work isn’t considered compensable time, even for employees whose worksites may vary. However, the rules regarding travel time can become much more complicated.

For instance, an employee is entitled to payment for any work you require her to perform during the commute, such as delivering products to clients. Further, any travel between worksites must be paid—and if an employee begins her workday at home, her commute from home to work may be considered compensable travel time.

Special out-of-town assignments and overnight travel may involve additional state and federal law considerations.

California requires payment to nonexempt employees for all such time, including air or train travel. You must ensure that you understand the implications of requiring nonexempt employees to travel for work (even to educational conferences or national meetings) and pay them in accordance with both state and federal law.

8. Not reimbursing expenses or failing to differentiate reimbursements from wages. You must compensate employees for all necessary expenses they incur as part of their job. You have several options for the method of reimbursement, including itemized reimbursements, a lump sum or monthly “allowance” for recurring expenses, or, in the case of use of personal vehicles, a mileage reimbursement rate.

Employers that use the lump sum or allowance method may provide the reimbursement as an increased base salary or commission rate; however, you must provide accurate, itemized wage statements that differentiate between wages and expense reimbursements. Moreover, under any method, the amount must provide full reimbursement for all actual expenses incurred.

9. Failing to compare the requirements for exemption under state and federal law. Just because an employee is exempt under federal law doesn’t mean he is exempt under California law. While the major categories of exemptions sound similar, the basic standards for eligibility are significantly different—including the minimum salary requirements.

Employee Expense Reimbursements in California: Your Compliance Obligations Explained—webinar next week!

Federal law may also classify an employee as exempt because he performs exempt duties, but California law requires that at least 50 percent of an employee’s duties be exempt.

10. Classifying employees as independent contractors. Most employers know that misclassifying an employee as an independent contractor carries a serious risk of wage and hour claims and penalties. However, it can still be tempting to try to avoid the payroll headache of hiring an employee for a short-term job, especially when the worker agrees to or desires the contractor classification.

A recent California law is intended to reduce that temptation by creating an additional fine of up to $10,000 for each willful misclassification and further fines for requiring misclassified workers to provide their own equipment or tools.

11. Improperly deducting debts from an employee’s paycheck. California employers may make the following deductions:

  • deductions authorized by state or federal law (such as state and federal income taxes, Social Security taxes, and state disability insurance taxes);
  • deductions the employee expressly authorizes in writing for insurance premiums or hospital or medical dues;
  • deductions to cover health and welfare or pension plan contributions that a collective bargaining or wage agreement expressly authorizes; and
  • other deductions not amounting to a rebate or deduction from the standard wage arrived at by collective bargaining or pursuant to a wage agreement or statute.

When a deduction is taken from an employee’s paycheck to repay a debt owed to the employer—for instance, in the case of payroll advances or employee loans—there must be express written consent from the employee.

Moreover, the deduction can’t reduce net pay below minimum wage. Even if employment is terminated and the balance of the debt has not been repaid, you aren’t permitted to deduct a “balloon payment” from the final paycheck.

Bottom Line

Compliance with wage and hour laws is difficult for California employers because of the requirement to comply with both California and federal law. Likewise, there are complex nuances contained in certain industry Wage Orders, regulations, and administrative guidance that create additional traps for the unwary.

The bottom line for employers is that policies and pay practices should be continually monitored for compliance, and issues should be addressed when discovered rather than as part of a labor commissioner charge or lawsuit.

Employee Expense Reimbursements in California: Your Compliance Obligations Explained

Employees have a right to be reimbursed for their work-related expenses, including business travel, training, equipment, materials—and sometimes even legal expenses.

Most companies typically maintain their own deadlines, rules, special forms, and other procedural requirements that must be followed to request and receive expense reimbursements. And mistakes in this area can prove extremely costly; you can be liable for payroll taxes and penalties on amounts that should have been counted as compensation.

Additionally, there’s been a spike in the number of IRS audits of employment tax-related issues in recent years—so there’s now a greater likelihood than ever that your organization’s expense reimbursement practices could wind up under the IRS microscope.

Having a firm grasp on which reimbursements should be treated as expenses and which should be treated as compensation can go a long way toward ensuring that your books survive IRS or Division of Labor Standards Enforcement scrutiny.

Join us on June 14 (next Thursday!) for an in-depth webinar—specifically for California employers—all about getting it right. You’ll learn:

  • How far your obligation to reimburse your employees extends under California and federal law
  • Which employee reimbursements should be treated as compensation, and which should be treated as expenses
  • The payments that are subject to payroll tax here in California
  • The travel-related expenses, such as meals and lodging, you must reimburse for, and when you’ll also owe employees for “incidental expenses” related to business travel
  • When employees may not be eligible for reimbursement for tools or equipment
  • When you must reimburse employees for uniforms—and whether you have to reimburse them for laundering their work clothes
  • Whether you can require employees to wear a certain type of clothing—but not an actual uniform—without reimbursing them for their purchases
  • Whether you may legally increase an employee’s wages or commissions instead of reimbursing them for actual expenses
  • The legally acceptable ways you can reimburse employees for the business-related use of their personal vehicles
  • How the IRS’s rule on the standard mileage rate differs from your obligations under the California Labor Code
  • The most common missteps California employers make concerning employee expense reimbursements
  • What your employee handbook should state about employee expense reimbursements so it’s up to date on the latest IRS and California Labor Code rules
  • What you should always get in writing before an employee separates from
    employment (including written verification from departing employees that they
    have requested reimbursement for all work-related expenses before leaving the

Don’t miss this opportunity to get all of your employee reimbursement questions answered—sign up today.

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Paying Overtime on Bonuses: A Calculation Guide

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