Fair, Accurate, And Compliant Remote Employee Reimbursement

Key considerations

COVID-19 has altered the way people conduct business and for many, working from home has gone from a benefit to a requirement. In the early stages of the pandemic when nationwide shelter-in place orders went into effect, many organizations embraced the sudden shift to remote work. While this transition was temporary for some businesses, a majority have since extended their telecommuting practices either indefinitely or permanently. This extension has created a new challenge employers are now navigating – how to adequately reimburse their employees for costs incurred while working from home.

When remote work was considered a temporary solution to closed offices and municipalities, employers also believed reimbursement was temporary. As such, many elected to only reimburse one-time expenses such as office furniture or technology upgrades. Now that businesses have committed to long-term telecommuting practices, bills for employees’ work from home expenses are adding up and employers are now struggling to identify where they are required to reimburse costs. 
 

Businesses have to account for a variety of factors when developing their reimbursement policies to ensure fairness, accuracy, and compliance with state and federal labor regulations. There are a number of considerations at play, but the most important are employee wages, the geographical location of team members, and the home office set-up required for an individual to adequately complete their job.

One of the most significant factors in determining employee reimbursement is where the person resides. For example, if a company has a team member living in California, it must reimburse the employee for “all necessary expenditures or losses incurred by the employee” in fulfilling job duties – which can encompass a variety of personal expenses incurred for business use. This includes but is not limited to personal cell phone use for work and personal vehicle expenses outside of normal commuting. 

Employees are entitled to reimbursement for these expenses even if the costs associated with the personal items did not increase. This means if remote workers have unlimited data plans on their cell phones and use them for work-related activities, they are still eligible for reimbursement despite no additional out of pocket costs.

While California has some of the most stringent labor laws from a reimbursement standpoint, it is far from the only state or jurisdiction providing remote work protection. Illinois tracks the California law, and a number of other states also have reimbursement requirements, like the District of Columbia, Iowa, Massachusetts, Montana, New Hampshire, New York, North Dakota, Pennsylvania, and South Dakota. Organizations are not entitled to shift business costs to employees and must maintain a written policy regarding reimbursement (including a mechanism by which employees can submit evidence of un-accounted for reimbursable costs). Regardless of whether or not an employee lives in one of the 10 states or territories with indemnification laws, it is a best practice for employers to clearly outline their policies for reimbursement to maintain as fair and accurate a practice as possible.

It is important to have a firm grasp on the costs remote employees are incurring on behalf of the business, as – in addition to the aforementioned state regulations – the federal Fair Labor Standards Act (FLSA) requires that employees earn at least the minimum wage net of any necessary business expenses. 

This is an important consideration to any work from home policy because when an employee’s remote work costs—including the obvious things like internet, but also the less thought-of items like increases in electricity costs,  and reasonable allocation of mortgage/rent in states like California — are debited from their compensation, take-home pay can fall below the minimum wage threshold. If an organization fails to recognize this or under-reimburses the employee, it will find itself out of FLSA compliance and be subject to significant fines and litigation.

When companies transitioned to having remote workforces during the early shutdowns due to COVID-19, one of the first hallmarks of reimbursement they showed was providing employees with a one-time home office stipend for furniture and technology. While this eased the initial transition of converting space in a team member’s home to an adequate work station, it did not relieve the burden of maintaining requisite standards of technology or real estate for meeting or exceeding work expectations. 

Organizations need to be mindful of what their workers have access to – such as mobile devices for business use, high-speed internet connectivity and the necessary equipment to access it, or expendable space within their home to repurpose for an indefinite work space – and reimburse them for monthly fees associated with business expenses. Employers can help their teams and remain compliant with state and federal laws by choosing to provide employees with a company-owned phone or shifting their mobile plan to a bring your own device (BYOD) alternative and by acknowledging and reimbursing the cost of internet speeds required to complete daily tasks and increased utilities.

There are multiple ways an employer can choose to reimburse its remote workforce. A monthly stipend is a fixed-cost method for businesses to compensate their employees for expenses associated with working from home. And, while this was a popular solution during the early stages of the pandemic, the monthly stipend can create winners and losers based on location and utility costs. It can also leave a company vulnerable to falling out of FLSA compliance due to its lack of scalability. The fixed-cost method does not take into account the fluctuation of monthly costs and presents the possibility for an employee not receiving an adequate reimbursement to remain above the minimum wage threshold. It is also a taxable benefit (to the employer and the employee), where reimbursements are largely tax-free.

An alternative and increasingly popular method for reimbursement is a fixed and variable rate (FAVR) reimbursement program. FAVR is the most fair and accurate means of reimbursement, as it takes into account an employee’s location, set costs and expenses that vary on monthly basis when providing payment. This is crucial for factoring in state and local taxes, internet speed packages, and fluctuating utility bills. And, for a BYOD program, FAVR will include considerations such as device costs, carrier costs, and device insurance.

Businesses and their teams are putting forth their best efforts as the global economy attempts to work forward and navigate this pandemic. As part of that, businesses need to be mindful of the expenses that shifted to their employees when their homes also became their offices. Reimbursement will be a critical component and a crucial step in addressing the new remote work realities of 2020.

Danielle Lackey is Chief Legal Officer at Motus. Follow @motusdotcom Connect Danielle Lackey