With the pandemic continuing, many offices remain closed and many employees are performing their job duties remotely from home.  In certain states, like California, employers are statutorily required to pay for remote work expenses. 

This had led many employers with remote workers in the Golden State to reasonably to ask, “what types of expenses are we required to reimburse employees for out there?”  Unfortunately, the law is very unclear on this issue and there are no bright-line answers for employers that have California employees working remotely. 

Here is some background on this issue, along with some tips for compliance.

What Law Applies in California?

Wage and hour obligations for California employers generally come from three sources—the federal Fair Labor Standards Act (“FLSA”), the California Labor Code, and the wage orders issued by the California Industrial Wage Commission applicable in the particular industry.  The California employer must comply with all three of these.   

FLSA

The FLSA generally does not require an employer to reimburse employees for remote work expenses, unless the amount of those expenses is such that it effectively causes an employee to be paid less than the federal minimum wage (and/or applicable overtime compensation) for all hours worked.  The federal Department of Labor’s COVID-related FLSA guidance explains this.

Because California employees generally work well above the federal minimum wage (because California’s minimum wage is much higher – currently 12 or 13 dollars an hour depending on the number of employees), this is rarely an issue.  However, if you have employees who are paid close to minimum wage with significant business expenses, you need to look more closely at the types of business expenses they may be incurring in connection with remote work to assess whether the expenses are of such an amount that the employee effectively is netting less than minimum wage plus any applicable overtime for all hours worked. If so, expense reimbursement will be required under federal law.

California Law

California (along with a handful of other states) has a specific law that requires employers to reimburse employees for necessary business expenses that they incur.  California’s law on expense reimbursement is contained section 2802 of the California Labor Code.  This statute requires employers to reimburse employees for all expenditures necessarily incurred by the employee in direct discharge of duties for the employer, or in obedience to directions of the employer. 

Unfortunately, this is not as easy to apply as it may seem.  Making matters worse, in 2014, a California court issued a decision in a case called Cochran v. Schwan’s Home Service, Inc., muddying up the standard even more.  In the Cochran case, the court addressed expense reimbursement requirements in circumstances where employees are required to use their personal cell phones for work purposes.  The court held that if an employee is required to use a personal cell phone for business purposes, the employer must reimburse the employee.  This is true even if the business use of the personal phone does not cause the employee to incur expense in excess of their usual, flat monthly rate.  Unfortunately, the court did not specify how much an employer is required to pay in expense reimbursement, just that it should be a reasonable percentage of the employee’s bill. 

Neither the wage orders, the California Labor Commissioner’s office, nor the California courts, have provided further clarification for employers on the scope and amount of expense reimbursement that is required under California law.  Disappointingly, the California Labor Commissioner’s office has failed to issue COVID-specific expense reimbursement guidance for employers with remote workforces due to COVID.

This leaves employers uncertain about the extent of their expense reimbursement obligations related to employees working from home.  Rest assured that California plaintiffs’ attorneys will file class action and Private Attorney General Act lawsuits against employers, alleging that they did not comply with their expense reimbursement obligations under Labor Code 2802.  As such, all employers who are requiring California based employees to work remotely should think about the types of expenses their remote employees are incurring and issue them a reasonable amount of expense reimbursement to cover those expenses.  These expenses may include use of personal phones and other devices, use of home internet/WiFi, use of office supplies, increased electricity costs, and the like.  Of course, for most of these things, no employer will be able to determine the precise portion of an employee’s expense that is work-related. 

As such, employers faced with reimbursing California employees should generally decide on a flat monthly amount that they believe reasonably covers the work-related expense associated with working from home.  An employer also can limit employee expenses by providing employer-owned equipment (e.g. cell phones, laptops, printers, hotspots) for employees to use at home. Regardless of the monthly amount decided on by the employer, the employer should tell its California employees what the expense stipend is intended to cover (all home-related work expenses) and include a provision telling employees that if, in any month, they believe that the expense stipend is not sufficient to cover their specific remote work expenses, the employee should notify Human Resources, so that the employee’s expenses can be reviewed and a determination made as to whether additional reimbursement is owed.

Of course, if California employees are incurring driving-related expenses, or concrete expenses associated with purchasing items needed to perform their jobs, those expenses should be compensated at the IRS mileage reimbursement rate and/or actual cost, as applicable.

Finally, remember that California’s expense reimbursement law only applies to expenses that are “necessarily” incurred in direct consequence of the job duties or in complying with an employer’s directions.  This means that if an employee is incurring expenses that are wholly unnecessary or unreasonably exorbitant, they need not be reimbursed.  Employers may want to adopt a policy requiring employees to get advance approval for before purchasing any items to use for their remote work.  This will help avoid unreasonable expenditures and a dispute over whether to cover it.

The “necessarily incurred” standard also raises the question of whether employers are required to reimburse remote work expenses where a California employee voluntarily chooses (but is not required) to work from home.  If an employer has reopened its offices and employees are welcomed to return to the office to perform their jobs, but are permitted to voluntarily choose to continue working remotely, there is a very good argument that the employee’s remote work expenses are not “necessary” and need not be reimbursed, particularly if the employer has notified employees that home office expenses will not be reimbursed in this situation (because employees are free to report to work and not incur any such expenses).

Bottom line:  If you have not already done so, evaluate your remote work arrangements in California and any need to adopt new or revised expense reimbursement policies.  If you are late to the game, you can always issue retroactive expense reimbursement for prior months of required remote work by employees. 

In recent years, some employers have implemented so-called “unlimited” vacation policies, mostly applied to exempt employees, that leave it up to employees and their supervisors to decide how much paid time off to take.  On April 1, 2020, the California Court of Appeal addressed for the first time whether California law requires an employer with an “unlimited” vacation policy to pay an employee for “unused” vacation upon the employee’s separation from employment.  The court held that on the specific facts of the case before it, the employer was required to pay its former employees for unused vacation, but also offered guidance as to what kind of unlimited vacation policy might relieve an employer of the obligation to pay out accrued but unused vacation upon an employee’s separation.

Background on California Law Governing Vacation Policies

California law does not require employers to provide employees with paid vacation.  But when an employer does provide paid vacation, Labor Code section 227.3 requires employers to pay as wages any “vested” vacation time that separating  employees have not used.  Decades ago, in Suastez v. Plastic Dress-Up Co., 31 Cal.3d 774, 784 (1982), the California Supreme court addressed when the right to vacation “vests” under section 227.3, stating:

The right to a paid vacation, when offered in an employer’s policy or contract of employment, constitutes deferred wages for services rendered.  Case law from this state and others, as well as principles of equity and justice, compel the conclusion that a proportionate right to a paid vacation “vests” as the labor is rendered.  Once vested, the right is protected from forfeiture by section 227.3  On termination of employment, therefore, the statute requires that an employee be paid in wages for a pro rata share of his vacation pay.

While Section 227.3 effectively prohibits so-called “use-it-or-lose-it” vacation policies, an employer may adopt a policy that creates a waiting period at the beginning of employment during which no vacation time is earned, and therefore none vests.  An employer may also adopt a policy that “caps” the amount of vacation an employee accrues, by precluding accrual of additional vacation time once an employee has reached a specified maximum.  Under such a policy, the employee does not forfeit vested vacation pay because no more vacation is earned once the maximum is reached, and therefore no more vests until such time as the employee uses accrued vacation, drops below the cap, and once again begins to accrue more vacation.

In order to pay a separating employee all “vested” vacation, an employer necessarily must keep track of how much vacation an employee earned and used during employment.  But what happens if an employer offers “unlimited” vacation to an employee, or allows an employee to take paid time off, but never notifies the employee of precisely how much paid time off the employee may take?  That is the question addressed by the California Court of Appeal in its recent opinion.

McPherson v. EF Intercultural Foundation, Inc.

EF Cultural Foundation, Inc. (EF) runs educational and cultural exchange programs between the United States and other countries.  While EF’s employee handbook included a policy providing most salaried employees with a fixed amount of paid vacation days per month based on their lengths of service, that policy did not apply to “area managers,” a handful of exempt employees tasked by EF to run the company’s programs within their regions.  While area managers could, with their supervisors’ permission, take paid time off, they did not accrue vacation days or track the number of vacation days they took, nor were they ever notified of any specific limit on the amount of paid days off they could take.

After their employment ended, three area managers sued EF, alleging the company failed to pay them accrued but unused vacation upon their separation from employment.  After a bench trial, the trial court found EF liable for failing to pay the plaintiffs unused vacation, finding the plaintiffs’ right to take vacation time was not truly “unlimited” but rather was “undefined.”  The trial court found that “vacation time vests under a policy where vacation time is provided, even if the precise amount is not expressly defined by the employer in statements to employees.”  The trial court explained that “offering vacation time in an undefined amount simply presents a problem of proof as to what the employer’s policy was.  That policy is implied through conduct and the circumstances, rather than through an articulated statement.”  The trial court concluded that based on the evidence presented at trial, the area managers were provided at least 20 days of vacation per year, therefore that amount vested annually for each plaintiff, and Section 227.3 required EF to pay them the unused portion when their employment ended.

The California Court of Appeal agreed with the trial court’s conclusion that Section 227.3 applied to the area managers “[o]n the particular, unusual facts of this case.”  The appellate court emphasized that the company did not provide the area managers “unlimited” vacation in practice, nor did the company publish a formal policy notifying the area managers they had “unlimited’ vacation, and therefore the trial court was correct in determining their right to vacation was undefined, not unlimited.  But the court was careful to note that although Section 227.3 applied to EF’s informal, unwritten vacation policy, that does not mean Section 227.3 “necessarily applies to truly unlimited time off policies.”  The court suggested that such a policy “may not trigger section 227.3” if the policy is in writing and it:

1. Clearly provides that employees’ ability to take paid time off is not a form of additional wages for services performed, but perhaps part of the employer’s promise to provide a flexible work schedule—including employees’ ability to decide when and how much time to take off;
2. Spells out the rights and obligations of both employee and employer and the consequences of failing to schedule time off;
3. In practice allows sufficient opportunity for employees to take time off, or work fewer hours in lieu of taking time off; and
4. Is administered fairly so that it neither becomes a de facto “use it or lose it policy” nor results in inequities, such as where one employee works many hours, taking minimal time off, and another works fewer hours and takes more time off.

Unfortunately, the court offered these criteria as only an “example” of an unlimited time off policy that might not require a payout of unused vacation upon the end of employment, and not as a bright-line rule.

The appellate court’s opinion makes it clear that not all unlimited vacation policies necessarily dispose of the requirement to pay some amount of “vested” vacation upon an employee’s separation.  Employers operating in California that wish to establish or continue unlimited vacation policies should review those policies, and modify them if necessary, to ensure they are consistent with the California court’s  guidance.

Aaron Buckley
Paul, Plevin, Sullivan & Connaughton LLP – San Diego, CA

Last Thursday, in a unanimous opinion, the California Supreme Court held that the time employees spend on an employer’s premises waiting for and undergoing required exit searches of their bags and other personal items that they bring to work purely for their own personal convenience, constitutes “hours worked” for which the employees must be paid.

Apple Inc. requires its retail store employees to undergo mandatory searches of their bags, packages, purses, backpacks, briefcases, and personal Apple technology devices (e.g., iPhones), before leaving the store for any reason, including after completing their work shift and clocking out.  In 2013, several employees sued Apple in a California federal district court to recover wages for the time spent undergoing these security checks.  They brought their claims under both California law and the federal Fair Labor Standards Act (FLSA).  The employees estimated that the time spent waiting for and undergoing the exit searches typically ranged from five to 20 minutes, but could take up to 45 minutes on the busiest days.

The district court dismissed the FLSA claims after the United States Supreme Court’s 2014 decision in Integrity Staffing Solutions v. Busk, which held that time spent undergoing mandatory security screenings is not compensable “hours worked” under the FLSA.  The district court later dismissed the plaintiffs’ California law claims, holding that exit search time was not “hours worked” because the employees could avoid the searches by not bringing bags or other personal items to work.  The employees appealed.

The Ninth Circuit Court of Appeals then asked the California Supreme Court to weigh in on the issue.  In last Thursday’s opinion, California’s high court hinged its decision on the significant differences between the FLSA and California law in defining “hours worked.”  In 1947, the FLSA was amended to narrow the definition of “hours worked,” excluding activities that occur before or after employees perform the “principle activity” they are engaged to perform.  As a result, under the FLSA, some pre-shift and post-shift activities are not compensable, even when required by an employer.  In contrast, California’s wage orders generally define “hours worked” much more broadly, to include all the time an employee is “subject to the control” of an employer, and all the time an employee is “suffered or permitted to work, whether or not required to do so.”

Applying this definition, the California Supreme Court concluded the employees were “subject to [Apple’s] control” when they waited for and underwent security checks, because these checks were required for Apple’s benefit.  The court rejected the district court’s conclusion that the security checks were essentially voluntary because employees could avoid them by not bringing personal items to work, reasoning that the realities of 21st-century life mean employees have little choice but to bring mobile devices and other personal items to work.

This decision illustrates two realities for all California employers.  First, California employees must be compensated for time engaged in pre-shift and post-shift activities that might not be compensable elsewhere.

Second, California employers should ensure employees are compensated for required activities that involve even very small amounts of time.  In 2018, the California Supreme Court held that the federal de minimis rule, under which small amounts of time need not be compensated under certain circumstances, does not apply to wage claims brought under California law.  As a result, claims for unpaid wages brought under California law are more difficult to defend.  Employers should therefore be vigilant about capturing and compensating employees for all time spent under the employer’s control, including security checks and other activities that might begin and end very quickly.

Aaron Buckley – Paul, Plevin, Sullivan & Connaughton LLP – San Diego, CA