When Should A Growing Team Update Its Expense Reimbursement Policy?

As your business grows, your expense reimbursement policy must keep pace with new team members, changing work arrangements, and evolving legal requirements. Many founders and operators only think about their reimbursement policy when a problem arises, such as a dispute over an expense, a wage claim, or confusion about what is covered. But waiting until there is a complaint or audit can expose your business to unnecessary risk and cost. This guide explains when to review and update your expense reimbursement policy, what federal and state laws require, and how to avoid common mistakes as your team expands.

What Is An Expense Reimbursement Policy?

An expense reimbursement policy is a written document that explains how your business will pay back employees or contractors for costs they incur while performing their work. Typical reimbursable expenses include:

• Travel (airfare, lodging, transportation, mileage)
• Meals and entertainment for business purposes
• Office supplies and equipment
• Mobile phone or internet used for work
• Professional development or training
• Client-related expenses

The policy should clearly state:

• Which expenses are eligible for reimbursement
• What documentation is required (receipts, logs, etc.)
• How and when to submit expenses
• Approval processes and spending limits
• Timeframes for reimbursement
• Any state-specific or role-specific rules

For small businesses and startups, a clear policy helps prevent misunderstandings, supports consistent treatment, and reduces the risk of disputes. As your team grows, these benefits become even more important. A vague or outdated policy can lead to inconsistent approvals, employee dissatisfaction, or even legal claims.

Federal Rules: What Does The Law Require?

There is no single federal law that requires all private employers to reimburse employees for every business expense. However, several federal rules shape how you must handle reimbursements:

• Fair Labor Standards Act (FLSA): The FLSA does not mandate reimbursement, but it does require that deductions for business expenses cannot reduce a non-exempt employee's pay below the federal minimum wage or required overtime rates. For example, if an employee pays for work-related travel and is not reimbursed, and this causes their take-home pay to fall below minimum wage, this is a violation.
• IRS Rules: The IRS distinguishes between "accountable" and "non-accountable" reimbursement plans. Under an accountable plan, reimbursements are not treated as taxable income if employees provide receipts and return excess advances. If your policy is not structured correctly, reimbursements may be treated as wages for tax purposes, meaning additional payroll taxes for both the business and the employee.
• Worker Classification: The Department of Labor and IRS both provide guidance on classifying workers as employees or independent contractors. How you handle expense reimbursements can be a factor in classification disputes. For example, routinely reimbursing expenses for contractors may suggest an employment relationship, especially if you control how, when, and what expenses are incurred.

For example, imagine you have a non-exempt employee earning $8 per hour (the federal minimum wage is $7.25). If you require them to pay $100 per month for their own cell phone used for work, and you do not reimburse them, their effective pay could fall below minimum wage. This could trigger a wage claim or Department of Labor investigation.

Similarly, if your reimbursement policy is not an "accountable plan" under IRS rules, your business and your employees may face unexpected tax liabilities. Employees could owe income tax on reimbursements, and your business could owe additional payroll taxes. To avoid this, your policy should require timely submission of expenses, proper documentation, and return of excess advances.

Worker classification is also a risk area. If you treat contractors like employees by reimbursing all their expenses and controlling their work, you may inadvertently create an employment relationship in the eyes of the IRS or Department of Labor. This can lead to back taxes, penalties, and wage claims.

State Law Triggers: When Are Reimbursements Required?

While federal law sets a baseline, several states have much stricter requirements for expense reimbursement. The most prominent is California, but other states and even some cities have their own rules. Here are some key examples:

• California: Labor Code Section 2802 requires employers to reimburse employees for all "necessary expenditures or losses" incurred as part of their job. This includes things like cell phone use, mileage, home internet (for remote work), and even some personal equipment if used for work. Failure to reimburse can lead to penalties and lawsuits. For example, if you have a remote employee in California who uses their personal cell phone and internet for work, you must reimburse a reasonable portion of those costs, even if your headquarters is in another state.
• Illinois: The Illinois Wage Payment and Collection Act requires reimbursement for necessary expenditures within 30 days of submission, as long as the employee follows your written policy. The law defines necessary expenditures as all reasonable expenses required by the employer and incurred in the discharge of employment duties.
• Massachusetts: While there is no explicit statute, courts have found that failing to reimburse employees for required expenses can violate the state's wage laws. For example, if you require employees to use their own vehicles for work, you may need to reimburse mileage at the IRS rate or a reasonable equivalent.
• Montana and New York: Both states have laws or regulations that require reimbursement for certain necessary expenses, especially for travel or equipment required by the employer.
• Local Rules: Some cities, such as Seattle, have their own reimbursement ordinances that may apply to employees working within city limits.

Even if your business is not based in these states, you may be affected if you have remote employees or contractors working from there. State law usually applies based on where the employee works, not where your business is located. This is especially important for distributed teams or remote-first companies.

Common mistakes include:

• Assuming your policy only needs to meet federal standards
• Failing to update your policy when hiring in new states
• Not training managers on state-specific rules
• Ignoring remote work arrangements that cross state lines

For example, a New York-based startup hires a remote employee in California but does not update its reimbursement policy to address California's strict requirements. The employee files a claim for unreimbursed internet expenses, and the company faces penalties under California law. This scenario is increasingly common as remote work expands.

When To Review And Update Your Expense Reimbursement Policy

There is no single schedule that fits every business, but certain events should always trigger a review of your expense reimbursement policy. Consider updating your policy when:

• Hiring in a new state: Each state may have different rules. Expanding into California, Illinois, or other states with strict reimbursement laws is a common trigger. For example, a Texas company hiring its first employee in Illinois should review and update its policy to comply with Illinois law.
• Adding remote or hybrid workers: Remote work can mean employees are subject to different state or city rules. For example, a remote employee in Seattle may be covered by local reimbursement ordinances, even if your business is based elsewhere.
• Changing your team structure: Bringing on more contractors, shifting roles, or growing from a handful of employees to dozens can create new risks and expectations. For example, moving from a founder-only team to a staff of 20 will require more formal policies and processes.
• Introducing new technology or tools: If your team starts using personal devices, home internet, or new software for work, your policy should address whether and how these expenses are reimbursed. For instance, if you switch to a bring-your-own-device (BYOD) model, clarify what expenses are covered.
• After a complaint or audit: If an employee raises a concern or a regulator asks about your policy, it is time for a review. Even a single complaint can signal a broader issue.
• Regularly, at least annually: Even without a specific trigger, reviewing your policy each year is a good practice. Laws change, and so do business needs. Many companies set an annual calendar reminder to review all workplace policies, including expense reimbursement.

Some founders tie policy reviews to major hiring rounds, funding milestones, or the start of a new fiscal year. Others review after onboarding remote employees or expanding into new markets. The key is to be proactive, not reactive.

Here is a practical example: A SaaS startup with 10 employees in Texas and Florida hires its first remote engineer in California. The company's existing policy does not address California's requirement to reimburse for home internet and cell phone use. The founder reviews the policy, consults with legal counsel, and adds a California-specific section to ensure compliance. This prevents potential claims and builds trust with the new hire.

What Should Your Expense Reimbursement Policy Include?

A strong expense reimbursement policy is clear, specific, and tailored to your business. At a minimum, your policy should cover:

• Eligible expenses: List what is and is not covered (travel, meals, equipment, software, etc.).
• Submission process: Explain how and when to submit expenses, what forms or systems to use, and what documentation is required.
• Approval process: Who approves expenses? Are there spending limits or pre-approval requirements?
• Deadlines: How long do employees have to submit expenses? How quickly will you reimburse them?
• Tax treatment: State whether your plan is "accountable" under IRS rules, and clarify how reimbursements are handled for tax purposes.
• State-specific rules: Note any differences for employees in certain states (like California or Illinois).
• Contractor expenses: If you reimburse contractors, clarify how this works and avoid language that suggests an employment relationship.
• Dispute resolution: How are disagreements about expenses handled?

Here is a practical checklist for reviewing your policy:

• Does your policy comply with all states where you have employees?
• Are all required expenses (like cell phone use for remote work) clearly addressed?
• Is your submission and approval process easy to follow?
• Are deadlines and documentation requirements clear?
• Does your policy avoid reducing pay below minimum wage?
• Is your plan structured as an "accountable plan" for IRS purposes?
• Are contractors treated consistently with their classification?
• Do you have a process for handling disputes or exceptions?

For example, if your business uses expense management software, make sure your policy matches how the system works in practice. If you require receipts for all expenses, but your software only allows uploads for amounts over $25, clarify this in your policy. Involve your finance, HR, and legal advisors in the review, especially when expanding to new states or adding remote workers.

It is also important to communicate your policy clearly to your team. Provide training for managers and employees, and make the policy easily accessible. Consider including examples of common expenses and how to handle unusual situations, such as lost receipts or emergency purchases.

Common Mistakes And How To Avoid Them

As your team grows, the following mistakes can create legal and operational headaches:

• One-size-fits-all policies: Using a generic template without adapting it to your business or state requirements. For example, a policy that works for a Texas-only team may not comply with California or Illinois law.
• Ignoring remote and hybrid work: Failing to update your policy for remote employees, especially those in states with strict reimbursement rules. For example, not reimbursing a California remote worker for home internet can lead to claims.
• Poor documentation: Not requiring or keeping receipts, mileage logs, or other proof of expenses. This can create tax and wage issues, and make it difficult to defend against claims.
• Late or inconsistent reimbursements: Delaying payments or applying policies unevenly can lead to wage claims or morale problems. For example, reimbursing some employees within a week but others after a month can create frustration and legal risk.
• Blurring employee and contractor status: Reimbursing contractors in the same way as employees (or requiring them to follow employee-like procedures) can create classification risks. For example, requiring contractors to submit expenses through your payroll system may suggest an employment relationship.
• Not training managers: Managers may approve or deny expenses inconsistently if they are not trained on the policy and legal requirements. This can lead to favoritism claims or disputes.
• Failing to update for new laws: State and local rules change frequently. A policy that was compliant last year may not be today. For example, new reimbursement requirements may be enacted at the state or city level.

To avoid these pitfalls:

• Review your policy at least annually and after hiring in new states
• Train managers and employees on the policy and any updates
• Keep clear records of all reimbursements and supporting documentation
• Work with advisors who understand both federal and state requirements

For example, a founder who expands into Illinois without updating the reimbursement policy may face a claim for unreimbursed travel expenses. By proactively reviewing and updating the policy, the business can avoid legal issues and build trust with new hires.

Another common mistake is failing to address exceptions or disputes. Your policy should include a clear process for handling unusual situations, such as lost receipts, emergency purchases, or disagreements about what is reimbursable. This helps resolve issues quickly and fairly.

FAQs

Do I have to reimburse all employee expenses?

Not necessarily. Federal law does not require reimbursement for every expense, but you must ensure that required business expenses do not push an employee's pay below minimum wage or overtime thresholds. Some states (like California and Illinois) require reimbursement for all necessary business expenses. Review your policy for each state where you have workers.

How do IRS rules affect my expense reimbursement policy?

The IRS distinguishes between "accountable" and "non-accountable" plans. Under an accountable plan, reimbursements are not taxable if employees provide documentation and return excess advances. If your policy is not structured as an accountable plan, reimbursements may be treated as taxable wages, increasing payroll taxes for both the business and the employee.

Can I have different reimbursement rules for employees and contractors?

Yes, but be careful. Employees and independent contractors are subject to different legal standards. Overly strict or employee-like reimbursement policies for contractors can create worker classification risks. Make sure your contractor agreements and policies reflect the true nature of the relationship and follow IRS and Department of Labor guidance.

What if I have remote employees in multiple states?

You must comply with the reimbursement laws of each state where your employees work, not just where your business is based. This means your policy may need to include state-specific sections or addenda. Regularly review your team's locations and update your policy as needed.

How often should I review my expense reimbursement policy?

At a minimum, review your policy annually and whenever you hire in a new state, add remote workers, or make significant changes to your team or business model. Regular reviews help catch legal changes and operational issues before they become problems.

Key Takeaways

• Your expense reimbursement policy should be reviewed whenever you hire in a new state, add remote workers, or change your team structure.
• Federal law sets a baseline, but many states (like California and Illinois) have stricter requirements.
• Proper classification of employees and contractors is critical, reimbursement practices can affect this.
• Policies should be clear, specific, and tailored to your business and team locations.
• Regular reviews, good documentation, and manager training help prevent disputes and legal risks.

If you are unsure whether your expense reimbursement policy is up to date or compliant with federal and state rules, consider seeking professional support. For questions about updating your policy or handling multi-state teams, contact our team at (888) 449-8437 or team@sprintlaw.com. Where legal services are required, they are provided by licensed US lawyers at ElevateNext US, LLC, a trusted US law firm, through the Sprintlaw platform.