Oops! Should That Expense Reimbursement Check Be a Paycheck?

Beware of auto pilot when issuing expense reimbursement checks to employees. Some, or all, of the money may technically be wages instead.

Says who? The DOL.

New guidance from the agency sheds light on a common scenario businesses face: Employees spend money out of their own pockets for items they use for their jobs, and then they send expense reports to A/P.

They’re expecting a check that matches the total amount submitted.

But according to the DOL, some reimbursement entries should actually be included in the regular rate of pay and used when calculating overtime due to employees under the Fair Labor Standards Act (FLSA).

You probably already knew that the IRS is looking over your shoulder when it comes to expense reimbursement checks, requiring steps such as having an accountable plan.

But the DOL guidance shows that these payments are an area of concern for that federal agency as well.

Here’s a recap of what the DOL said in its recent opinion letter.

Adding Up the Money

A services company in the oil and gas industry wanted the official word from regulators about the daily expense payments it made to employees for tools and equipment.

The employees worked as inspectors on pipelines. Given that they worked so far from home, in addition to their wages, they received:

• mileage reimbursement at the IRS rate for business-related travel, and
• a per diem for living and meal expenses.

But that wasn’t all. The company also provided reimbursement payments for the inspectors’ use of personal items in the field, including:

• cell phones
• cameras
• computers
• vehicles
• safety equipment and gear, and
• other tools and equipment.

When working on projects in the past, the company had given employees $25 per day for tools and equipment.

However, it wanted to make a significant increase, going as high as $150 to $200 per day.

The question was: Could the company continue to exclude those per diem payments from the inspectors’ regular rate of pay?

That didn’t look likely, the DOL’s Wage and Hour Division said in its November 8, 2024, opinion letter.

Complying with the FLSA

The FLSA requires that nonexempt employees be paid time-and-a-half the regular rate of pay if they work more than 40 hours in a workweek.

The regular rate must include all remuneration. But there are exceptions.

Several exceptions are provided in 29 U.S.C. Sec. 207(e)(2). One of them is for: “reasonable payments for traveling expenses, or other expenses, incurred by an employee in the furtherance of his employer’s interests and properly reimbursable by the employer.”

Right off the bat in its opinion letter, the DOL honed in on one portion of the FLSA as it applied to the company: Inspectors had to actually incur the tools-and-equipment expenses.

Assuming that was the case, the next element of the law that the DOL discussed in FLSA 2024-01 was whether the company’s payment would closely match the amount the employees incurred.

The DOL noted it doesn’t have a specific method for approximating employees’ expenses for reimbursement. That said, the method chosen must be reasonable.

The DOL also explained that any excess reimbursement would need to be included in the regular rate of pay for overtime purpose. In other words, any excess amount couldn’t be issued to employees in reimbursement checks — it’d have to show up in their paychecks.

There was one bit of good news. The entire amount of the expense payment didn’t have to be included in the regular rate of pay — just the excess amount, the DOL said.

Overtime in Their Paychecks

The company planned to increase its payments for tools-and-equipment expenses by a significant amount. Indeed, payments would be six to eight times higher than in the past.

Let’s say the per diem checks of $125 to $150 would have been more realistic than $25. Even if that were the case, the company didn’t indicate that the inspectors actually incurred such significant ongoing expenses, the DOL pointed out.

Bottom line: It didn’t appear to regulators that the higher expense reimbursement amounts could be excluded from employees’ regular rate of pay.

Therefore, simply cutting expense reimbursement checks wasn’t an option. The employer would need to consider the amounts as wages and, if the inspectors worked more than 40 hours during a workweek, use the amounts to calculate overtime.

Reviewing Policies and Practices

Of course, reimbursing employees goes far beyond cell phones and computers being used for work purposes — or even miles driven for business travel.

The potential list of what can be added to reimbursement checks is much longer.

Certain types of reimbursements have been on hold for the past few years. But that’s about to change. The Tax Cuts and Jobs Act of 2017 said that employers had to temporarily include the following types of reimbursement in employees’ wages for tax purposes:

• relocation expenses, and
• bicycle commuting expenses.

Those provisions are set to expire at the end of 2025, though.

Reviewing your expense reimbursement policies and practices now can help you prepare for what lies ahead.