This Wisdom of the Crowd (ACC member discussion) discusses the pros and cons of implementing a flat rate travel expenses policy as opposed to a reimbursement system, under US law. This resource was compiled from questions and responses posted on the forum of the Employment & Labor Law ACC Network.*
*(Permission was received from the ACC members quoted below prior to publishing their forum comments in this Wisdom of the Crowd resource.)
Question:
My CFO wants to implement a new policy whereby we would no longer reimburse for travel expenses (at least mileage) and for cell phone use for exempt employees. He wants to build the cost into the wages (increasing wages by an amount that equals an average expense reimbursement), and eliminate the tedious reimbursement process. In his mind, this would eliminate paperwork and the risk of people padding their expense reports. He also wants employees to use their own cell phones for business purposes. He would make it part of the new hire process, so new hires would know from the beginning that there is no reimbursement for these items and that they must have their own cell phones as the company will not be issuing one. I have major reservations about this, but need help rom this forum formulating legal arguments why this is not a good idea.
First, it seems to be that we will be inflating the employees' wage base which they will pay taxes (income tax, Social Security, FICA, etc.), whereas expense reimbursement was not previously taxable. As a company, we will also increase our payroll taxes. An employee's wage will also be inflated for worker's comp purposes. From an HR standpoint, this makes it all very unpalatable for the employees and will affect morale. Although employees may relish not having to fill out expense reports, they will see this as a take-back, not a positive. Aside from the BYOD (Bring Your Own Device) security/confidentiality issues, I also have concerns about ensuring that employees have adequate data plans to conduct business, and the wide fluctuation in these. I would appreciate the wisdom of this group to flesh out any other issues I haven't considered.
Wisdom of the Crowd:
- Response #1: I would have to think through all the legal issues, but on the phone I would really push data protection and privacy. If you don't own the phone, I haven't researched this but I would assume you would not own the data or communications, even if they are related to company business.
- As to the expense issues, I know in California, it's required by statute. However, I don't think it's required by any other states or federal law. The employees' option is to deduct the expenses on their taxes. So, I think you need to hammer the employee satisfaction element of this. Unless an employee has a very predictable expense history, I think it would be hard to even out the cost. Either you or the employee is going to fall short. And, the points you made about wage inflation are very good. I know my company uses a software service called Certify for expenses. The employees can literally scan the receipts into their phones (in your case, truly their phones) and the program does basically the rest. The supervisor gets an e-mail with the request and can check yes or no or follow up. They can click on any receipts they want. It's pretty inexpensive, and everybody here loves it. It's really made the process a breeze.i
- Response #2: As previously noted, California would certainly require reimbursement of business related expenses. Texas does not require such reimbursement, but I would guess it is a mixed bag in other states. If expense account abuse is the concern, more robust expense report auditing might be a better solution. The tough explanation to your CFO, beyond any legal argument, is that almost no established or admired company is going to have their employees going out-of-pocket for business expenses. The unintentional consequences in terms of recruiting, retention, employee relations, and employees making decisions in the best interest of the company (and not out of concern as to whether they can afford the expense) outweigh the small percentage of the population who abuse expense reports.ii
- Response #3: There is, I believe, a California case, which suggests that an upfront agreement that a certain portion of the employee's pay is intended to cover mileage or other expenses, is an acceptable arrangement. The case is Gattuso v. Harte-Hanks Shopper. I have not researched this issue recently and don't remember all the specifics of the Gattuso case. I concur with [Response #2] that it would not be a decision to enter into lightly, even if permissible by law.iii
- Response #4: BYOD for cell phones is doable, but you need a policy requiring all users to adopt corporate software to ensure the ability to capture work-related communications for eDiscovery purposes and other reasons and to ensure the ability to remotely wipe phones if they are lost/stolen while containing company information and documents. Bumping up somebody's pay rate by $60 per month is not really a wash for the employee or employer due to taxes but it is simple. Travel/mileage is much harder and not advisable.iv
- Response #5: What about using set per diem rates based on destination? That way employees are not paying out of their own pockets if asked to travel, but the reimbursement process would not require receipts and tallying of individual expenses. I think that the federal government uses that approach to pay for employee travel, and their city rates are published by the General Services Administration.
- I don't recall whether that would still qualify as an IRS accountable plan (for excluding the reimbursements from income).v
- Response #6: A per diem plan can count as an accountable plan. The IRS says you have to meet all 4 of these requirements for the per diem plan to be an accountable plan:
- - Your employer reasonably limits payments of your expenses to those that are ordinary and necessary in the conduct of the trade or business. - The allowance is similar in form to and not more than the federal rate - You prove the time (dates), place, and business purpose of your expenses to your employer within a reasonable period of time. - You are not related to your employer. If you are related to your employer, you must be able to prove your expenses to the IRS even if you have already adequately accounted to your employer and returned any excess reimbursement.vi