Tools of the Trade: Hotel Expense Reimbursement Policies
By Christine Samsel Attorney, Brownstein Hyatt Farber Schreck | June 14, 2020
This article was co-authored by Jesse Sutz, Associate, Brownstein Hyatt Farber Schreck
Multi-jurisdictional hospitality companies (i.e., those operating in multiple states across the country) are subject to varying requirements as to whether and to what extent employees must be reimbursed for certain out-of-pocket expenses incurred in performing their job duties. The short answer is that the business expenses for which employers must reimburse employees, if any, depend on the jurisdiction in which the employee works.
Many states have no specific requirements regarding expense reimbursements, and require compliance only with federal law. However, as outlined below, several states have more stringent requirements.
Federal Law and the Minimum Wage
Federal law sets the minimum requirements for expense reimbursement, mandating that business expenses incurred by the employee cannot cause the employee's effective wage to drop below the federal minimum wage (currently $7.25) or overtime wage, if applicable, in any given workweek. The pertinent federal regulation provides:
[I]f it is a requirement of the employer that the employee must provide tools of the trade which will be used in or are specifically required for the performance of the employer's particular work, there would be a violation of the Act in any workweek when the cost of such tools purchased by the employee cuts into the minimum or overtime wages required to be paid him under the Act.
29 C.F.R. § 531.35.
The key question under federal law is what are "tools of the trade"? Federal courts have interpreted this regulation to mean any items purchased by the employee for the primary benefit of the employer. In the hospitality context, this analysis generally will be specific to the employee's role. For instance, where an employee is required to wear and maintain a company-specific uniform, the uniform, and cleaning and maintenance costs for the uniform, could be business expenses constituting "tools of the trade." Actual tools and equipment required for employees like mechanics, groundskeepers and maintenance workers would (quite literally) be "tools of the trade." Likewise, employees required to drive in their roles can show that expenses related thereto are encompassed within the regulation.
From a federal perspective as it pertains to expense reimbursement, the first step is to assess what items employees are required to have that are not provided by the employer, and what expenses they are required to incur. Pursuant to interpretive case law, the second step is to determine whether those items and/or expenses are primarily for the benefit of the employer. And finally, the employer must assess whether these expenses, when subtracted from the employee's regular wages, bring the employee's hourly wage below the federal minimum wage (or overtime rate, if applicable).
Some States Have More Stringent Requirements
Crafting expense reimbursement policies that comply with federal law is straightforward, in that a "one-size-fits-all" policy can be implemented. However, states are increasingly enacting laws addressing required expense reimbursement as well. The circumstances requiring reimbursement vary from state to state based on that state's laws, regulations and interpretive case law.
Moreover, many states have different minimum wage and overtime requirements that exceed the federal standard. Below we outline some specific state laws to keep in mind, with the caveat that this is not an exhaustive nationwide list; in addition to the jurisdictions highlighted below, Iowa, Montana and Washington, D.C. (among others) have specific requirements pertaining to expense reimbursements.
California requires reimbursement of "all necessary expenditures or losses incurred by the employee in direct consequence of the discharge of his or her duties, or of his or her obedience to the directions of the employer." Cal. Lab. Code § 2802. Unlike the federal standard, there is no reference in California's state law to the reduction of compensation below the applicable minimum wage.
Rather, expense reimbursements are required if the expenses are necessarily incurred in the performance of the services. With reference to the examples outlined above, California employees required to wear a company-specific uniform (as opposed to general attire, such as black pants and a white shirt) or purchase their own tools or equipment must be reimbursed for those expenses, regardless of the amount.
In addition, California requires reimbursement of actual expenses or mileage (less normal commuting miles) for business usage of the employee's personal vehicle; the IRS mileage reimbursement rate is presumed to reimburse an employee for all vehicle-related expenses (other than tolls, parking and the like). California also requires that employees be reimbursed for business usage of cellphones and related devices, home internet service, meals and entertainment expenses in appropriate circumstances.
Illinois this year enacted a law similar to California's requiring employers to reimburse employees "for all necessary expenditures or losses incurred by the employee within the employee's scope of employment and directly related to services performed for the employer." 820 I.L.C.S. § 115/9.5. "Necessary expenditures" means "all reasonable expenditures or losses required of the employee in the discharge of employment duties and that inure to the primary benefit of the employer." Id. As in California, necessary expenses must be reimbursed, regardless of any impact of such business expenses on the employee's wages.
In contrast with California and Illinois, New York's requirements dovetail with federal law, with one twist. That is, under New York law, an employer need not reimburse an employee for tools of the trade unless doing so would cause the employee's wages to fall below the applicable minimum wage. This is a bit tricky in New York, because the minimum wage is higher than the federal minimum wage, and varies depending on the work location.
For example, the minimum wage is higher in New York City ($15 per hour) and the surrounding counties of Westchester, Nassau and Suffolk (currently $13 per hour) than elsewhere in New York. Employers must ensure they are analyzing expense reimbursement requirements in accordance with the applicable minimum wage.
While there is no general expense reimbursement statute, there is one express requirement under Massachusetts law pertaining to reimbursement of travel expenses where employees are required to report to sites other than the regular work location, or travel between work locations. Specifically, the Massachusetts minimum wage regulations provide that "[i]f an employee who regularly works at a fixed location is required to report to a location other than his or her regular work site, the employee shall be compensated for all travel time in excess of his or her ordinary travel time between home and work and shall be reimbursed for associated transportation expenses." 45 C.M.R. 27.04(4)(b).
Likewise, "[a]n employee required or directed to travel from one place to another after the beginning of or before the close of the work day shall be compensated for all travel time and shall be reimbursed for all transportation expenses." 45 C.M.R. 27.04(4)(d).
Remote Work Considerations
In light of the COVID-19 epidemic, which has hit the hospitality industry particularly hard, and related "shelter-in-place" orders, companies have permitted or required employees (particularly salaried employees) to work remotely where possible. Employers must pay particular attention to expense reimbursement requirements for remote workers.
Business expenses incurred in working remotely could include equipment (such as printers, computers, cellphones, etc.), supplies (e.g., printer ink and paper, envelopes and stamps), and service fees (for example, internet and cell service, FedEx and shipping service charges). The employer should assess whether any of these expenses are reimbursable, whether in whole or in part, under the laws of the applicable jurisdiction.
Risks for Employers
Failing to reimburse employees for business expenses can prove costly, resulting in liability not just for payment of the expenses themselves, but also penalties, interest and the claimants' attorneys' fees and costs. Numerous class actions have been filed by employees under federal and state law alleging that their employers failed to reimburse them for expenses incurred, dropping their compensation below minimum wage and/or in violation of applicable state law.
For example, several class actions were brought recently by pizza delivery drivers asserting that their employers failed to reimburse them for expenses attributable to their required use of personal vehicles, as well as cellphone and uniform expenses. These have resulted, in some cases, in multimillion-dollar outcomes.
Tips to Avoid Liability
Employers should examine their expense reimbursement policies, in conjunction with legal counsel, to ensure compliance with applicable law. We outline some tips for developing compliant expense reimbursement policies below:
- Identify jurisdiction-specific expense reimbursement laws applicable to the company;
- Consider what equipment and services employees are required to have to perform their duties, including employees who are expected to or who choose to work remotely, and identify which are provided by the employer and which are sought to be at the employee's expense;
- With respect to those items sought to be at the employee's expense, analyze each item under applicable law, including determining whether they primarily benefit the employer;
- With the assistance of counsel, develop clear policies that will be compliant in the jurisdictions in which the company operates, and ensure that employees are made aware of those policies (e.g., through the employee handbook or a freestanding policy, or via the company intranet); and
- For equipment that may be required of employees (e.g., a cellphone or computer), consider including a question in the employment application as to whether the candidate already possesses such equipment, with the caveat that a "no" answer will not of itself disqualify the candidate from employment. (Note: If the individual already possesses the equipment, there is less likelihood that he or she can claim that such equipment is a reimbursable business expense).
With appropriate care and legal guidance, employers can navigate the tricky maze of federal and state expense reimbursement laws.
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