Question:

I occasionally require my employees to travel on business, and I am not sure if I am legally required to reimburse them for all of their out of pocket expenses. What are the requirements for reimbursing employees who travel on company business?

Answer:

California Labor Code section 2802 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.”  Work-related expenses incurred by an employee while performing his or her job are normally reimbursable by the employer. This law applies to work-related expenses such as travel, equipment, materials, and training. The Labor Code also states that an employee may not enter into a contract or agreement to waive the reimbursement right, and that any attempt to do so is null and void.

Because of this law, most businesses have a reimbursement policy in place to explain what expenses are reimbursable, and the process for obtaining reimbursement of those expenses. For instance, an employee traveling for business may need to submit receipts to verify his or her reimbursable expenses (such as gas, rental car, or meals) on a specific form, within a certain number of days after the conclusion of his or her trip. Some policies include a limit on what is considered to be a “reasonable” expense (for example, placing restrictions on the amount that an employee may be reimbursed for meals), and most policies provide that reimbursement is subject to approval by a supervisor or other managerial employee.

In the recent case of Stuart v. Radioshack Corp., the U.S. District Court for the Northern District of California addressed the issue of what happens when an employee doesn’t report work-related expenses in accordance with company policy. The Court was asked to decide whether an employee’s failure to follow the employer’s reimbursement policy allowed the employer to deny reimbursement for legitimate work-related expenses. The plaintiffs in the Radioshack case sought reimbursement for expenses related to use of their personal vehicles to perform inter-company store transfers. The employer knew about this vehicle use but refused to reimburse the employees for their related expenses because the employees did not follow proper internal procedures for requesting reimbursement. The employees sued, claiming that the employer had violated its reimbursement duty under the Labor Code by failing to indemnify them for expenses related to the performance of their job duties.

In finding for the employees, the court ruled that the requirements of the Labor Code trump any internal reimbursement rules that may be set by an employer.  California employees therefore have a right to be reimbursed for their work-related expenses when the employer knows or has reason to know that the employee has incurred the expense, even if the employee fails to follow internal reimbursement protocol established by the employer. Moreover, employees need not make a formal request for reimbursement in order to trigger the employer’s obligation.

Because Labor Code section 2802 is vague as to when the employer’s duty to reimburse is triggered, the court looked to overtime cases where both federal and state courts have required plaintiffs seeking unpaid overtime to prove that the employer in question had actual or constructive knowledge of the alleged “off the clock” work that was performed. The court therefore drew a parallel between overtime liability and expense reimbursement, finding that before an employer’s reimbursement requirement is triggered, it must either know or have reason to know that the employee has incurred a work-related expense. Once the employer has this knowledge, the duty to exercise due diligence in ensuring that the employee is properly reimbursed is triggered.

Employers should continue to establish policies for expense reimbursement, and to enforce deadlines and procedural requirements that employees must follow in order to request and receive work-related expense reimbursements. However, employers must also recognize that they are liable for reimbursement of employees’ expenses even if an employee fails to adhere to the exact terms of the company’s internal reimbursement policy. The lesson to be learned from the Radioshack case is that while an employee may be disciplined for failing to follow an expense reimbursement policy, an employer cannot withhold reimbursement if it knows or has reason to know that the employee has incurred a work-related expense.

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