Do Work-from-Home Employees Reduce a Business’s Expenses?

Allowing employees to work from home could reduce your business’s expenses, but you may have to reimburse your employees for their costs of working from home. Here are important details to consider.

Can a business cut costs by having employees work from home? Do the benefits of remote workers outweigh the potential disadvantages and challenges? That’s a question many businesses are pondering now. Many companies that hadn’t let employees work from home in the past were forced to test remote work to safeguard the health of employees and keep their businesses going during the pandemic. In fact, a Stanford Institute for Economic Policy Research (SIEPR) survey conducted in May 2020 found that 42% of the U.S. labor force was working full-time from home.

In many cases, that unplanned test of having employees work from home worked out so well that companies are considering extending remote work arrangements indefinitely.

Big corporations like Facebook, Twitter, and Shopify have all indicated that allowing employees to telecommute may continue even after the dangers of the pandemic have passed. And it isn’t just Internet businesses that are jumping on the virtual employee bandwagon. Retailer REI and Nationwide insurance both have announced plans to let some employees work remotely.

But what about businesses that don’t have the resources those mega-corporations do? Is it practical to let your employees work at home? What are the challenges? Are there any legal ramifications that could adversely impact your business?  Here are some of the top pros and cons of letting your staff work remotely.

Benefits of Letting Employees Work from Home

One of the biggest benefits of having employees work from home is the cost savings. With fewer or no employees working in an office building, a business can downsize its space requirements and save on the cost of rent, utilities, and related office expenses such as office supplies, equipment, and insurance for the space being leased. Companies with employees who normally travel to clients’ locations can save substantial amounts on travel costs by having the client work done remotely, too.

In addition to cost savings, businesses may benefit by being able to attract employees from a wider geographic area, and by improving employee job satisfaction.  Employees often prefer working from home because it saves the time, cost, and stress of commuting, eliminates the cost of buying lunch, and can reduce what they spend buying work clothes and/or having them cleaned. Studies have shown that as many as 80% of employees say they would like to be able to work from home at least some of the time.

Two Legal Problems for Employers with Remote Workers

But while reducing your operating costs sounds like the sure road to increased profitability, there are some pretty big potholes that could jar your business if you don’t avoid them. Among the biggest potential problems for employers are the requirements (or in some cases desirability) of reimbursing employees for their costs for working from home and the need to track hours accurately.

When do you need to reimburse employees for work-at-home expenses?

The rules for reimbursement employees depend on several things. Among them: state law, minimum wage and overtime rules, and whether the working from home is optional or required. Unfortunately, some laws vary from state to state, and there aren’t yet any court rulings that spell out requirements for some issues.

State Laws Regarding Reimbursing Employees

One of the key issues is what state your business is located in, says Jeffrey Naness, a partner in the law firm Naness, Chaiet, and Naness, located in Jericho, New York.  Naness, who specializes in labor relations, employment law, emphasizes that “states vary widely” in terms of obligation to reimburse expenses.

“California has a specific law mandating reimbursement of business expenses. There have been cases that held that, even though the expense was a flat-rate cell plan that the employee had anyway, the employer was still obligated to reimburse the expenses of using it.”

As a result, in California and some other states, the courts may hold that employers are required to pay a portion of employees’ wi-fi and other expenses, even if the employee did not increase his/her own costs.

While California may be the most aggressive on this matter, they aren’t the only location requiring reimbursement. Illinois, the District of Columbia, and Montana are among the other locations that have laws related to reimbursing employees for at-home expenses.

Federal Fair Labor Standard Act

State labor laws aren’t the only ones that may require expenses to be reimbursed. No matter what state your business or employees are in, the Federal Fair Labor Standards Act (FLSA) may come into play. If you have employees who are being paid near the minimum wage, the FLSA may require your business to reimburse their costs for working at home, too.

“Although the FLSA doesn’t require reimbursement of expenses, if the payment of business expenses by an employee brings them under minimum wage or what they would have to be paid for working overtime, then a  claim could be brought under Fair Labor Standards Act, “ explains Naness.

For example, suppose you have an employee who earns the federal minimum wage and whom you require to work at home. They pay $60 a month for internet access and $70 a month for their smartphone. If they make minimum wage, subtracting those costs ($130) from the salary they earn would cause their hourly rate to fall below the federal hourly minimum wage level. Therefore, you may be required under the FLSA to reimburse the employee for their personal expenses incurred working for you to the extent the employee’s pay is brought under minimum wage, taking into account these expenses.

Do remote workers have to be reimbursed for personal internet and phone bills they’d pay even if they weren’t working from home?

The answer, at the moment, depends partly on the state in which you and your employees are located. In California, for instance, if the employee must use their personal phone for work calls, the employer is required to pay a reasonable percentage of the phone bill. A handful of other states have laws covering what expenses have to be reimbursed when employees work from home, but in the majority of states, the law isn’t clear yet about what does or doesn’t have to be repaid.

But, the pandemic has caused somewhat of a shift in thought on this question, too.

“Before the pandemic, there were court decisions that said the employer didn’t have to reimburse the additional expenses of working at home if working from home was purely voluntary,” says Naness. “In that case, the costs weren’t necessary. The employee could have worked in the office.”

Because of the pandemic, many employers started requiring employees to telework because of isolation orders, or because they think it’s safer for employees who can work from home to do so. In states that don’t already have specific laws covering remote workers and reimbursement of expenses, “it’s unclear how the courts would rule on the issue,” says Naness.

In California and perhaps some other states, “the logic of past court decisions would suggest if the employer requires that the employee to work at home, the employer may be obligated for a share of ongoing internet expenses that the employee would have paid anyway. If you want to be careful as an employer, you might decide that you’ll pay some portion. Then the interesting thing is what portion.”

To determine that proportion, one option is to an analysis of what percent of usage was for work and what percentage for personal use.

Wage and Hour Compliance for At-Home Workers

“A major issue is tracking time for hourly employees,” says Naness. With no time clock to punch or no supervisor on-site to see what time they arrive and leave, “how do you keep track of when they are and aren’t working?”

The answer is to insist on some kind of tracking. It can be online activity monitoring or online timesheets, paper timesheets, or any other method of recording time. Whatever tracking method you choose should indicate when the employee stopped working for their lunch break. “That’s an enormous area where claims arise — employees saying they didn’t take their lunch break and should be paid for that time,” Naness emphasizes.

Another area of concern, he adds, has to do with exempt employees an employer requires less work from, and allow to work from home for a reduced salary. While the work they do may still qualify them as exempt from overtime rules, the salary reduction might lower their income below the minimum required to be considered exempt. In that case, they’d need to track their time and pay overtime for any week the employee worked more than 40 hours. 

Minimize legal problems with a written work-from-home policy

Employers should have a written policy that covers reimbursement and all the other issues that arise when employees work from home.

As far as reimbursing employees goes, the policy should make it clear that to be reimbursable, the employee’s expenses have to be “reasonable and necessary business expenses,” says Naness. “There should be a provision that requires the employees to request for reimbursement with sufficient documentation to support the request and indicates a time limit for submitting the request. There should also be a provision requiring employees to get preapproval for expenses over a certain dollar amount. You might want to specifically deal with certain expenses that are a problem such as computers or printers.”

In addition to covering the terms for reimbursing the expenses for employees who work remotely, the policy should cover all the other related issues. These include things such as which jobs qualify for working from home, the percentage of time employees will work from home, whether remote work is temporary or permanent, the hours of the day and days of the week they’re expected to work, the break time they’re required to take, and how working hours will be monitored.

For hourly employees, the policy should include information on whether or not they must get advanced permission to work overtime. Safety and security measures that are required for at-home workers should be spelled out as well.

Disclaimer: The content on this page is for informational purposes only, and does not constitute legal, tax, or accounting advice. If you have specific questions about any of these topics, seek the counsel of a licensed professional.