A California Court of Appeals case has broadened the obligation to reimburse employees for expenses.

Executive Summary

Coverage:  All clients with employees working in California.

Effective Date: Immediate

Overview:   A California Court of Appeals case has broadened the obligation to reimburse employees for expenses.

Action Required: Review expense reimbursement procedures, distribute an updated handbook policy and contact your Human Resources Business Partner for additional guidance as needed.

The Details

A California Court of Appeal issued a decision in Cochran v. Schwan’s Home Services, Inc., that took an expansive view of an employer’s obligation to reimburse employees for business expenses.

The Trial Court

In this case, the employee sued his employer to recover expenses for work-related use of his personal cell phone and claimed that California Labor Code § 2802 requires the company to reimburse its employees for mandatory work-related calls made on their personal cell phones.

Section 2802 states in relevant part:

An employer shall 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, or of his or her obedience to the directions of the employer, even though unlawful, unless the employee, at the time of obeying the directions, believed them to be unlawful.

The trial court held that the obligation to reimburse the employee would depend on (1) whether the employee had a plan allowing unlimited use; and (2) whether the employee or a family member paid the bill.   In short, the court ruled that no reimbursement is owed unless the employee had to pay something out of pocket, above and beyond the expense to maintain the cell phone for personal use.

The Appellate Court

The appellate court disagreed, and ruled that reimbursement is always required where an employee uses a personal cell phone for mandatory work-related calls.  The court indicated that the employer would otherwise receive a windfall because it would be passing its operating expenses onto the employee.  In the court’s opinion,  it did not matter whether the phone bill was paid for by a third person or at all.   Employees only have to show that they were required to use their personal cell phone for work-related calls to be entitled to reimbursement.  In such a case, the reimbursement owed is a reasonable percentage of the cell phone bills.  The Court concluded that what constitutes a “reasonable percentage” will depend on the facts and circumstances of each particular case.

Updated Handbook Policy

We have recently updated our Business Expense Reimbursement handbook policy to clearly indicate that employees will be reimbursed for reasonable approved expenses incurred in the course of business.  We recommend that clients distribute and that employees acknowledge receipt of the new policy in writing.  The acknowledgement should be maintained in the employee’s personnel file. 

The new policy may be accessed on FormSource under the New Hire section and is titled “Handbook Update – Multi-state – Business Expense Reimbursement.”

Practical Impact

The court’s language suggests that any expense which potentially falls into the category of an operating expense is reimbursable.  This might include for example laptops, tablets, internet connections and other personal items that are used for work.  Employers must carefully consider their risk tolerance in this area.  As a practical matter, in many cases, it may make sense to simply provide employees with the asset needed vs. attempting to determine a reasonable percentage of business use (something that is likely to be litigated in the future).

As always, please contact your HR Business Partner if you have any questions.