Must employers reimburse their employees for work-related expenses, like cell phones and laptops used for work calls and projects? Illinois recently joined the growing state trend, requiring employers to reimburse expenses incurred by employees within the scope of their employment. As a result, many nonprofits need to revisit and update current reimbursement policies and communicate these changes to employees to mitigate against unexpected liability in this area. Additional employment law aspects make legal compliance even more compelling.
Illinois’ New Reimbursable Expense Law
Under newly enacted section 9.5 of the Illinois Wage Payment and Collection Act (“Act”) (effective January 1, 2019), employers are obligated to reimburse employees for all necessary expenses incurred within the scope of their employment. A "necessary” expense is defined in section 9.5 as all reasonable expenses that: (a) are required by the employer in the discharge of the employees’ duties; and (b) are primarily for the benefit of the employer.
Notably, an employer will not be liable for reimbursement of employee expenses under section 9.5 of the Act if: (a) the employer has an established written expense reimbursement policy; and (b) the employee failed to comply with the procedures under that policy. Additionally, so long as the written policy provides a reasonable reimbursement amount for expenses, the employer will not be required to reimburse the portion of an expense that exceeds what is allowed under its policy. An employer may not rely upon the exception set forth in section 9.5, however, if it authorized or required the expense to be incurred by the employee or if it failed to comply with its own written expense reimbursement policy.
To qualify for reimbursement under the Act, the employee must substantiate the expense within thirty days after it was incurred, unless a longer period is specified in the employer’s written expense reimbursement policy. If the employee does not have a receipt available for the expense, he or she must submit a signed statement regarding the absent receipt.
Make It Plain
This new law provides a clarion call for clear communications with employees. If an employer does not want to reimburse an employee for work-related cell phone usage, then the employer should make clear prospectively that the employee is expected not to use his or her own phone for work purposes. The same applies for laptops or other computer devices. On the other hand, if an employer expects an employee to use such devices as an integral part of his or her job, then the employer should communicate that such devices may be purchased and reimbursed by the employer – with express parameters for what types of devices and/or related costs are acceptable. (Or, the employer could purchase the device for the employee). And if there is some middle ground, such as employees who are expected to occasionally use their personal cell phones or other devices for work, then a partial employee reimbursement of related expenses may be appropriate. For example, an employer could cover part of the employee’s monthly cell-phone plan expenses or a reasonable percentage of the employee’s device purchase.
Out-of-Pocket Expenses?
Interpretive guidance has yet to be developed on this new law, leaving some open questions with respect to its application. In particular, it is unclear under the new law whether an employee must actually incur an additional expense to receive a reimbursement from his or her employer, such as when an employee uses a personal cell phone with unlimited data or home internet for required work-related purposes.
Consider the following example. Employee X is frequently required to use her personal cell phone for work-related calls outside of normal business hours, but she already has a cell-phone plan with unlimited data. While a certain portion of Employee X’s monthly bill can arguably be allocated to the work-related use of her cell phone, Employee X has not actually incurred any additional out-of-pocket expenses. She is paying the same amount for her cell-phone plan as she would have paid if she were not required to use her cell phone for work. Under Illinois law, it is not clear whether the employer in this situation is required to reimburse Employee X’s cell phone expenses. In contrast, California courts have required employers to reimburse a reasonable amount of cell phone expenses based on the employee’s actual use of a personal cell phone for work-related purposes.[1] Illinois employers may wish to take a conservative approach and follow suit.
Federal Tax Law Implications
Employers should keep in mind that reimbursing employee expenses under Illinois’ new law may have federal tax implications as well. In particular, note that reimbursements that exceed what is ordinary or necessary for an employer’s business may result in taxable income to its employee. Such liability may arise regardless of whether the employee or employer provides the device.
The IRS addressed the employer-provided cell phone scenario in its Notice 2011-72, directing that the value of employer-provided cell phones may be excluded from employee income only if the cell phone is provided primarily for non-compensatory business purposes. In such case, the value of the cell phone will be excluded from the employee’s income as a “working condition fringe” benefit. “Working condition fringe” benefits are employer-provided property or services that would have been deductible as a business expense to the employee had the employee paid for such property or services. A cell phone is “primarily for non-compensatory business purposes” if the employer has a substantial business reason for providing the cell phone. A substantial business reason might be that the employer needs its employee to be available for work-related emergencies or client calls outside of normal business hours. If the employer-provided cell phone is primarily for non-compensatory business purposes, the entire value of the cell phone will be excluded from the employee’s income, even if the employee uses the cell phone occasionally for personal use.
Moving on to the employee-provided cell phone context, if an employer has a substantial business purpose in requiring its employee to use a personal cell phone for work-related purposes, the employer may likewise reimburse the employee’s cell phone expenses as a non-taxable working condition fringe benefit. The following conditions must be met for such nontaxable treatment: (a) the employee maintains the type of cell phone coverage that is reasonably related to the needs of the employer’s business; (b) the reimbursement amount is reasonably calculated not to exceed the employee’s actual cell-phone expenses; and (c) the reimbursement for business use of the employee’s personal cell phone is not a substitute for the employee’s normal wages.[2]
Wage Law Implications Too
Note too that requiring that nonexempt employees under the Fair Labor Standards Act (“FSLA”) be regularly available for communication with the employer or clients outside of normal working hours may additionally result in overtime wage obligations. For example, an employer who requires an administrative assistant to check emails and make phone calls outside of his or her regular forty-hour work week could owe overtime wages for the employee’s time engaged in such work activities. Consequently, careful attention should be paid to whether employees should be classified as exempt or non-exempt. [3] And to avoid overtime liability for non-exempt employees, they should be required to either (a) not work outside of their regular full-time hours; or (b) keep detailed and accurate time records showing that they work only forty hours per week.
Action Items for Follow-Up
Several key take-aways apply for employers desiring to implement or update their expense reimbursement policies in light of Illinois’ new law.
1. Put it in writing.
Every employer should have a written reimbursable expense policy, compliant with applicable state and federal law. Employers should ensure that its written expense reimbursement policy clearly expresses the process by which employees may receive expense reimbursements. For example, must employees receive employer approval prior to incurring a work-related expense and from whom should the employee obtain such prior approval? Additionally, employers should require proper substantiation of expenses within thirty to sixty days of incurring such expenses.
2. Communicate the policy and follow it.
Make sure that the employee handbook contains the policy, with related guidance for using it as noted above. If an employer does not have an employee handbook, then communicate the policy and its requirements through a separate written communication. The reimbursement policy may be made known to volunteers as well, to the extent that they likewise may have reimbursable expenses.
3. Make sure the written expense reimbursement policy allows employees to receive reimbursements for all “reasonable expenses” incurred in discharging employment duties.
Communicate prospectively what is considered “reasonable” under the employer-specific circumstances, such as expenses for required work-related travel or necessary use of cell phones or laptops for substantial work reasons, and any advance approval required.
4. Employers should set appropriate parameters on work-related expenses, and such parameters may vary among employees.
For example, employers may wish to clearly and regularly communicate to nonexempt employees that they should not use personal cell phone or laptops for work-related purposes. But the converse may be true for exempt employees, who may travel more and need to be available outside the office. For them, it may be appropriate to provide a non-taxable cell phone or other device benefit, commensurate with the employee’s expected work usage.
Thanks to this Illinois law and the growing state trend, now is a great time for employers to check up on their reimbursable policies. So, get one, update it as needed, make sure employees are aware of it, and follow it closely. And don’t forget about proper tax treatment either!
[1] See Cochran v. Schwan’s Home Service, Inc., 228 Ca. App. 4th 1137.
[2] See I.R.M. § 4.23.5.15.3.2.
[3] For more information on exempt and non-exempt employees, see here.
