California requires reimbursement of ALL necessary business expenses. No waiver allowed. Applies fully to remote workers.
Labor Code Section 2802
What "Necessary" Means
An expense is "necessary" if it is:
- Required to perform job duties - the employee needs it to do their work
- Reasonable under the circumstances - not extravagant or excessive
- Incurred in direct consequence of work - not purely personal expenses
Why This Applies to Remote Workers
When you require (or permit) employees to work from home, the expenses they incur to do so become necessary business expenses. Courts have consistently held that:
- If the employee must have internet to work, you must reimburse it (or a portion)
- If the employee uses their personal phone for work, you must reimburse it (or a portion)
- If the employee needs equipment to perform their duties, you must provide or reimburse it
No Waiver Allowed
Section 2802 is non-waivable. You cannot have employees sign an agreement waiving their right to expense reimbursement. Any such waiver is void and unenforceable. The employee retains the right to reimbursement regardless of what they signed.
Key Case Law
Cochran v. Schwan's Home Service (2014)
- Employees entitled to reimbursement even with unlimited phone/data plans
- Employer must reimburse reasonable percentage of monthly cost
- Cannot require employee to "prove" out-of-pocket loss
Gattuso v. Harte-Hanks Shoppers (2007)
- Reasonable estimate of business use is sufficient
- Need not calculate exact expense to the penny
Voluntary Remote Work Exception
If the employer provides a fully-equipped office and the employee VOLUNTARILY chooses to work remotely for their own convenience, some expenses may not be considered "necessary." However, this exception is narrow and does not apply when remote work is required, expected, or encouraged by the employer.
Internet, cell phone, equipment, supplies, and software - if required for work, you must reimburse.
Remote Work Expense Categories
| Expense Category | Reimbursement Approach |
|---|---|
| Home Internet | Percentage based on work use (commonly 50-100%) |
| Cell Phone / Phone Bills | Percentage based on work use, even if unlimited plan |
| Computer / Laptop | Full if required; employer-provided preferred |
| Monitor | Full if required for job duties |
| Keyboard, Mouse, Peripherals | Full if required for job |
| Desk / Chair (Ergonomic) | Full or stipend if required by employer |
| Office Supplies | Full for work-related items |
| Software / Subscriptions | Full if required for job (employer should provide) |
| Printer, Ink, Paper | Full if required for job duties |
| Electricity / Utilities | Potentially percentage (less commonly required) |
| Coworking Space | Full if employer-directed or approved |
Common Reimbursement Items
What Does NOT Require Reimbursement
- Purely personal expenses with no work connection
- Expenses for items the employee would have anyway (but work-use portion still reimbursable)
- Extravagant or unreasonable expenses beyond what the job requires
- Expenses incurred by truly voluntary choice when office is available
The "They Already Had It" Trap
You cannot avoid reimbursement by arguing the employee "already had internet at home" or "already had an unlimited phone plan." Under Cochran, the work-related portion is still reimbursable. The employee's pre-existing personal use does not eliminate your obligation.
Actual expense method vs. stipend method. IRS guidelines, safe harbors, and documentation requirements.
Two Approaches to Reimbursement
Stipend Approach
- Fixed monthly amount
- Simpler administration
- Predictable costs
- Less paperwork
Risk: If stipend is less than actual expenses, you're still liable for the difference.
Actual Expense Approach
- Reimburse documented expenses
- More accurate
- Tied to real costs
- More administration
Benefit: Directly addresses actual expenses incurred.
Common Stipend Amounts (2025)
IRS Guidelines and Tax Treatment
Under IRS rules for accountable plans:
- Business connection: Expenses must have a business purpose
- Substantiation: Employee must substantiate expenses within reasonable time
- Return of excess: Employee must return any amounts exceeding actual expenses
Tax Treatment
Properly structured expense reimbursements under an accountable plan are not taxable income to the employee. Stipends that don't meet accountable plan requirements may be treated as taxable wages. Consult with a tax professional for your specific situation.
Documentation Requirements
- Written expense reimbursement policy
- Clear list of covered expenses
- Submission process and deadlines
- Receipt requirements (typically for expenses over $25-75)
- Approval workflow
- Reimbursement timing (best practice: with next paycheck)
Hybrid Approach Example
Policy: Company provides $100/month stipend for internet and phone, plus reimburses actual equipment purchases up to $1,500 for initial home office setup. Ongoing supply purchases reimbursed with receipts.
Benefit: Reduces administrative burden for recurring costs while ensuring adequate coverage for larger purchases.
Company-provided vs. BYOD policies. Equipment ownership, return requirements, and final pay deduction rules.
Company-Provided Equipment
- Remains company property at all times
- Employee must return upon termination
- Company should maintain inventory/asset tracking
- Clear return instructions in offboarding process
Equipment Purchased with Stipend/Reimbursement
A critical question: Who owns equipment the employee purchases with company funds?
Employee Ownership Model
- Stipend is compensation
- Employee owns purchases
- No return required
- Simpler offboarding
Company Ownership Model
- Reimbursement for company assets
- Company owns purchases
- Return required at termination
- Requires asset tracking
Best Practice
Clearly state in your expense policy whether reimbursed equipment becomes employee property or remains company property. This avoids disputes at termination and clarifies return obligations.
BYOD (Bring Your Own Device) Policies
If employees use personal devices for work:
- Reimbursement for work use is still required (Section 2802)
- Security requirements should be clearly documented
- MDM (Mobile Device Management) enrollment may be required
- Data segregation between personal and work
- Privacy boundaries must be respected
Labor Code Section 221 - Wage Deductions
Final Pay Deduction Rules
You generally cannot deduct the value of unreturned equipment from an employee's final paycheck without written authorization obtained at the time of the alleged loss. Even with authorization, deductions are limited. You cannot withhold final pay pending equipment return.
Equipment Return Best Practices
- Written equipment agreement at time of issuance
- Inventory/asset tracking with serial numbers
- Clear return instructions during termination
- Provide pre-paid shipping materials
- Set reasonable deadline (e.g., 5-10 business days)
- Separate equipment return from final pay timeline
Flat "no reimbursement" policies, inadequate stipends, and the assumption that no policy = no liability.
Mistake #1: "No Reimbursement" Policies
A policy stating employees are not entitled to expense reimbursement is void and unenforceable. Section 2802 cannot be waived. Having such a policy just creates evidence that you knew about the obligation and chose to ignore it.
Mistake #2: Expense System Without Payment
Requiring employees to submit expenses through a system, then not actually processing or paying those expenses, creates excellent evidence of willful violation. If you have an expense system, you must actually pay submitted expenses promptly.
Mistake #3: Inadequate Stipends
Setting a stipend at $25/month when actual internet and phone expenses are $100+ creates ongoing liability. If your stipend doesn't cover actual necessary expenses, you remain liable for the difference. Err on the side of adequate stipends.
Mistake #4: No Policy = Still Liable
Having no expense reimbursement policy does not eliminate the obligation. Section 2802 applies by operation of law. The absence of a policy just means you have no documented system for compliance, making it easier for plaintiffs to prove violations.
Other Common Issues
- Excessive approval requirements: Making reimbursement so difficult that employees give up
- Delayed payments: Taking months to reimburse submitted expenses
- Inconsistent enforcement: Reimbursing some employees but not others for the same expenses
- Relying on "they already had it": Assuming pre-existing personal services eliminate reimbursement obligation
- Capping at arbitrary amounts: Setting expense caps below actual necessary expenses
The Right Approach
- Written policy clearly explaining what is covered
- Reasonable stipend or straightforward reimbursement process
- Prompt payment (with next paycheck is best practice)
- Consistent application across all employees
- Regular review to ensure adequacy of stipend amounts
Written policy requirements, submission procedures, approval timelines, and record retention.
Essential Policy Elements
- Statement that company will reimburse necessary business expenses per Labor Code Section 2802
- Clear list of covered expense categories
- Reimbursement method (stipend, actual, or hybrid)
- Stipend amounts if using stipend approach
- Submission process and deadlines
- Documentation/receipt requirements
- Approval workflow
- Reimbursement timing
- Equipment ownership and return requirements
- Process for requesting additional or unusual expenses
Submission Procedures
Sample Submission Process
1. Monthly Stipend: Automatically included in payroll - no submission required for covered items (internet, phone).
2. Equipment/Supplies: Submit expense report via [system] within 30 days of purchase. Include receipt for items over $25. Manager approval required for items over $100.
3. Pre-Approval: Equipment purchases over $500 require pre-approval from [manager/HR].
Approval Timelines
Recommended Timelines
Record Retention
- Expense reports: Retain for at least 4 years
- Receipts: Retain for at least 4 years
- Policy acknowledgments: Retain for duration of employment + 4 years
- Equipment agreements: Retain for duration of employment + 4 years
Annual Review
Review stipend amounts annually to ensure they remain adequate as costs increase. Internet and phone costs may change, and what was adequate last year may no longer cover actual expenses. Update policy and amounts as needed.
Waiting time penalties, PAGA exposure, class action risk, and interest on unpaid amounts.
Direct Liability
The primary liability is for the unreimbursed expenses themselves, plus interest. But the exposure grows significantly through additional penalties.
Expense Reimbursement Liability
Waiting Time Penalties
Labor Code Section 203
If unreimbursed expenses are considered part of "wages due" (courts have found this in some cases), failure to pay at termination can trigger waiting time penalties:
- Up to 30 days of wages at the employee's daily rate
- Accrues for each day final pay is late
PAGA Exposure
Section 2802 violations can be brought as Private Attorneys General Act (PAGA) claims. PAGA penalties are $100 per employee per pay period for initial violations, $200 for subsequent violations. In a class/representative action covering many pay periods and employees, this multiplies rapidly.
Class Action Risk
Expense reimbursement claims are particularly well-suited for class actions because:
- Common policy (or lack thereof) affects all employees
- Damages are relatively easy to calculate
- Remote workers have similar expense profiles
- A single policy violation affects everyone equally
Exposure Calculation Example
Scenario: 50 California remote employees, $100/month in unreimbursed expenses, 2 years without proper policy.
- Unreimbursed expenses: 50 x $100 x 24 months = $120,000
- Interest at 10%: ~$12,000
- PAGA penalties: 50 x 52 pay periods x $100 = $260,000 (or more)
- Attorney fees: Often 25-33% of recovery
- Potential total exposure: $400,000+
Attorney's Fees
Under Labor Code Section 2802(c), prevailing employees can recover reasonable attorney's fees and costs. This incentivizes plaintiffs' attorneys to bring these cases, even for relatively small individual claims.
Prevention is Far Cheaper
A $100/month stipend for 50 employees costs $60,000/year. Compare this to the potential $400,000+ exposure from just two years of non-compliance. Implementing a compliant expense policy is a straightforward, cost-effective way to eliminate this risk.