Expense Reimbursement Laws by State

California, Illinois, and Massachusetts have laws that require reimbursement of employee business expenses. Here's a guide to these laws and how to craft car allowance policies that comply.

What states require mileage reimbursement?

The states of California, Illinois, and Massachusetts require employers to reimburse work vehicle costs. None of these states explicitly mandates mileage as the form of reimbursement. However, many businesses reimburse mileage to comply with the following three laws:

California: CA Labor Code Section 2802 indemnifies employees from any expenses incurred as part of their job responsibilities. This includes all expenses related to the business use of a personal vehicle.

Illinois: The Illinois Wage Payment and Collection Act (IWPCA) also falls under the category of an expense indemnification labor code. The state amended its law effective 2019 to cover all reasonable expenses incurred on the job.

Massachusetts: MA regulation 454 CMR 27.04(4d) requires employers to reimburse all expenses incurred by employees for work. As with California and Illinois, employers operating in this state must cover all expenses related to using a personal vehicle for work.

State mileage reimbursement laws

California's mileage reimbursement law is also known as an expense indemnification law. An expense indemnification law is designed to ensure two things:

1. Organizations do not pass on business expenses to employees.
2. Employees’ wages are not impacted by the employer’s expenses.

In a nutshell, unreimbursed business expenses effectively lower an employee’s wages. Therefore, state legislatures protect employee wages by dictating full reimbursement of business expenses. 

Mileage reimbursement rates for CA, IL, and MA

Illinois and Massachusetts essentially have the same law as California. This means employers in all three states should offer a mileage reimbursement or car allowance that fully covers costs.

The federal rate of 67 cents-per-mile and the fixed and variable rate method (aka FAVR) both are accepted rates in these states. But what about car allowance policies? Car allowances are not, strictly speaking, reimbursements. This means that car allowances may not always meet the criteria in these states.

All states with reimbursement laws

Eleven U.S. jurisdictions currently place expense reimbursement requirements on employers:

1. California - "all necessary expenditures and losses" incurred for work
2. Illinois - "all necessary expenditures and losses" incurred for work
3. Iowa - "expenses...authorized by the employer" must be reimbursed within 30 days
4. Massachusetts - all "necessary and unavoidable" expenses for work
5. Montana - "all that he necessarily expends or loses" in work duties
6. New Hampshire - "expenses not paid for by wages...or other means"
7. New York - all benefits and reimbursements promised to the employee
8. North Dakota - "all that the employee necessarily expends or loses" for work, except for "the ordinary risks of the business"
9. South Dakota - "all that the employee necessarily expends or loses" for work
10. Washington, DC - "the cost of purchasing any tools required" for the job
11. Seattle, WA - "all...business expenses and remote work expenses"

Only California, Illinois, Massachusetts, and the city of Seattle explicitly indemnify employees from expenses in full. The other states have employee-friendly laws that apply to business reimbursements. These laws vary and are worth learning if your business operates in one of those jurisdictions.

Business expenses covered by employee reimbursement laws

Expense indemnification codes cover a variety of employer expenses. Some expenses go beyond the obvious to include personal items used for work purposes:

• Personal vehicles
• Personal cell phones
• Personal laptops and tablets
• Data plans and internet bills

When an employee is expected to use his or her own personal equipment to get the job completed, the employee should be properly reimbursed.

Vehicle expenses covered by state reimbursement laws

The largest reimbursable expenses derive from the use of personal vehicles. These expenses include the business portion of:

• Depreciation of the vehicle's value
• Taxes, fees, registration, license
• Gas, oil, tires, maintenance
• Insurance premiums

Unfortunately, many car allowances do not explicitly cover these expenses. States with strict reimbursement laws do not always play well with traditional car allowances.

Reimbursement laws and car allowances

If your business operates in states with reimbursement laws, pay close attention to your car allowance amount. How well does your company car allowance meet employee expense needs? If you cannot answer the question, that is a problem.

One challenge is that a car allowance is not actually a reimbursement. With a typical car allowance policy, the company does not substantiate the business use of the vehicle by tracking mileage or receipts. This lack of a paper trail renders the allowance taxable. It also makes it difficult to prove that the allowance covers business vehicle expenses.

Inflation, car allowances, and labor laws

Due to inflation over the past few years, companies may face increased risk of labor law violations. This will happen if the car allowance amount has not kept up with rising costs.

Switching from a taxable car allowance to a non-taxable vehicle reimbursement could be a sensible solution. This approach would redirect that money currently going to taxes and make it possible to prove that each employee receives a full reimbursement of business vehicle expenses.

If your organization operates in multiple states, it’s wise to go ahead and make sure all employee reimbursement policies uniformly comply with laws like California Labor Code Section 2802 and the Illinois Wage Payment and Collection Act.

If you would like guidance on how to review and amend your organization’s vehicle reimbursement policies, contact mBurse today.