For decades, employers have relied on IRS policy that says when meals are provided for "the convenience of the employer," the value of the meal is not taxable income. That policy is apparently about to change. The IRS announced on August 26, 2014 in its Priorities Guidance Plan that one of its new "priorities" will be new guidance "regarding employer – provided meals." The Wall St. Journal reported on September 4, 2014 (subscription required) that IRS auditors are "flagging the issue and demanding back [payroll] taxes from companies amounting to 30% of the meals' fair market value."

This development will affect the company cafeterias at high-profile tech companies in California as well as thousands of hotels and restaurants that provide free meals to employees. It is also a near certainty that where the IRS treads the state taxing authorities will be close behind.

This development may also impact the calculation of the "regular rate" for purposes of overtime compensation. If the value of the free meal is taxable compensation, Plaintiffs' class action lawyers (who are already circling in the waters on this issue) will argue that the value of the meals must also be blended into the hourly rate on which overtime is calculated. For example, if the stated hourly rate is $10 (overtime = $15/hr) and the meal is worth $4, arguably, the new "regular rate" for an eight-hour shift would be $10.25 (overtime = $15.125/hr). California law on this "regular rate" and overtime point is not crystal clear, and we can expect litigation over the issue in the future. Some employers may want to proactively adjust their payroll practices in order to head off the potential problem.

We all knew there's no such thing as a free lunch. We're just learning now that the free lunches may be way more expensive than previously thought.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.