Since remote and hybrid work became normal for many companies, some workers are complaining that their employers should pay for work-from-home expenses, such as internet and electricity costs, printers and office supplies.
A few employees are even suing their employers to recover what they’re spending on work-from-home expenses. Bank of America, Liberty Mutual Insurance, Oracle, Visa and Wells Fargo are among the high-profile companies that have had to defend themselves in court, according to a Los Angeles Times report.
But what does the law actually say about expense reimbursement? The Fair Labor Standards Act requires it only if out-of-pocket business expenses cause a nonexempt employee to make less than minimum wage.
However, some states mandate employer reimbursement for employees’ expenses and not just for nonexempt employees. In two states, that includes work-from-home expenses.
State law & work-from-home expenses
Companies with employees in California need to be aware of Labor Code Section 2802, which requires reimbursement as expenses are incurred as a direct consequence of employment.
In Williams v. Amazon.com Services LLC , the plaintiff was sent home to work in 2020, like many of his co-workers, because of the pandemic emergency. The employer didn’t pay for work-from-home expenses, it told the judge, because it was a government order that sent employees home.
But the court said a government order doesn’t absolve an employer from legally-required reimbursement of expenses from the performance of job duties.
To differing degrees, these states, as well as Seattle and Washington DC, have laws requiring employers like you to reimburse employees’ out-of-pocket business expenses:
- Illinois (including work-from-home expenses)
- Iowa (employer authorization’s required for the expenses)
- Minnesota (limited to uniforms, purchased or rented equipment, or consumable supplies, and are to be paid upon termination of employment)
- Montana
- New Hampshire
- New York (only applies if it’s in an employee’s contract)
- North Dakota, and
- South Dakota.
For more information on what the jurisdictions your employees work in may require, go to the appropriate Dept. of Revenue website or do an internet search for “(your state or city) tax laws” or “reimbursement in the state of/city of (your state/city).”
What about tax-deductibility?
If your organization is considering work-from-home expense reimbursements because of the federal tax deduction allowed under an IRS accountable plan, your Finance team needs to be diligent.
For example, your A/P team will need to collect documentation. Under IRS accountable plan rules, with the exception of reimbursing employees for the business use of their cell phones, employees must be able to establish a business connection for the expense and they must provide receipts, bills and expense reports.
Speaking of establishing business connection, you probably won’t be able to reimburse for an employee’s home electricity or home office space tax-free because substantiating the business connection to an IRS auditor will be hard.
The same thing applies to employees’ use of their own computers for work. A better idea would be to provide employees with company laptops.
But you can reimburse tax-free for the business use of home internet, as long as employees document the percentage of this use on a daily or weekly basis and submit their bills to you.
Another option is a stipend for anticipated, reasonable work-from-home expenses. But because stipends are taxable income, they would have to be reported on the employees’ W-2s.
