United States: Illinois Department Of Labor Adopts Regulations Addressing Employee Expense Reimbursement And Wage Deductions

The Illinois Department of Labor (IDOL) recently adopted new regulations governing several provisions under the Illinois Wage Payment and Collection Act (IWPCA). Among them, the IDOL adopted new regulations that:

1. create a five-factor test for determining when work-related expenses incurred by an employee primarily benefits the employer, such that the employer is required to reimburse the employee for those specific expenditures;
2. clarify when employers may be liable for payment of employee expenses that exceed amounts set forth in the employer's written expense reimbursement policy;
3. create new recordkeeping requirements relating to employee-incurred expenses;
4. clarify when an employee may file a claim with the IDOL seeking reimbursement of expenses;
5. clarify what constitutes an enforceable wage deduction agreement for deductions occurring over a defined period; and
6. create enhanced penalties for violations of the IWPCA.

The new regulations took effect March 31, 2023.

Initially, it is important to understand the distinction between laws and regulations. Laws are generally the product of written statutes passed by the U.S. Congress or state legislatures, for example. Regulations, conversely, are standards and rules adopted by administrative agencies (here, the IDOL) that govern how laws (here, the IWPCA) will be enforced by the agency (here, the IDOL). Like laws, regulations are codified and published so that parties (here, employers) are on notice regarding what is and is not legal. And regulations often have the same force as laws, because, without them, regulatory agencies such as the IDOL would be hindered in their enforcement of the laws for which they are tasked with enforcing.

Reimbursable Expenses – New Five-Factor Test

As it relates to an employer's obligation to reimburse employees for work-related expenses, Section 9.5 of the IWPCA provides:

Prior to the new regulations, the IDOL offered no written guidance for employers to use in determining if a particular work-related expense an employee incurred was for the "primary benefit" of the employer. Fortunately, that has changed with the adoption of the new regulations. The regulations create the following five-factor test for employers to use in making this determination:

1. Whether the employee has any expectation of reimbursement;
2. Whether the expense is required or necessary to perform the employee's job duties;
3. Whether the employer is receiving a value that it would otherwise need to pay for;
4. How long the employer is receiving the benefit; and
5. Whether the expense is required of the job.

The new regulations also provide that no single factor is determinative; rather, "the analysis should focus on the extent to which the expense benefits the employer and its business and business model." Employers should immediately revise their written expense reimbursement policies to incorporate the above five-factor test into the policy and should begin applying these factors in making any such relevant determinations. If employers do not have such a policy, they should create one with the assistance of employment counsel.

Reimbursable Expenses – New Written Expense Policy Guidance

It is strongly recommended that all employers have in place a written expense reimbursement policy. Strict adherence to the policy is also strongly recommended, based on the possible ramifications under the new regulations for any variance from the policy, especially as it relates to reimbursable expense amounts.

The new regulations provide that even if an employer's written expense reimbursement policy establishes specifications or guidelines for reimbursable expenditures, but the employer, "through direct authorization or practice," allows for reimbursement of amounts that exceed those specified in its written policy, the employer will be liable for full reimbursement of such expenses.

Thus, employers must be diligent in strictly following their policy. Employers must understand that if they deviate from their written policy in any material way, for example, by authorizing and/or approving expenses that exceed the amounts set forth in their policy, this may result in the IDOL finding an employer-approved change to the policy, whether intended or not, and requiring the employer to pay the full amount of the reimbursement owed to the employee.

Reimbursable Expenses – New Recordkeeping Requirements

The new regulations require employers to keep the following records regarding employee expenses, all of which must be maintained for three years:

• All policies regarding reimbursement;
• All employee requests for reimbursement;
• Documentation showing approval or denial of reimbursement; and
• Documentation showing actual reimbursement and supporting documents.

Thus, it is imperative that employers inform any individuals in their organization (e.g., managers, payroll, etc.) who review or approve/deny employee expense reimbursement requests of the new recordkeeping rules. Employers should also update their document retention policies to comply with these new recordkeeping requirements.

Reimbursable Expenses – Denial of Requests for Reimbursements

The new regulations provide that once an employer denies an employee's request for reimbursement of expenses, or fails to respond to an employee's request for reimbursement of expenses (no time period provided in the new regulations), and the expenses are of the nature "that should have been reimbursable" under the new five-factor test, an employee may file a claim under the IDOL for reimbursement.

Employers should therefore explain in their written policy the process for reviewing and approving/denying reimbursement requests. The policy should also include the anticipated period of time it will take to review and make a reimbursement determination, so as to preempt an employee from hastily filing a claim with the IDOL that alleges a failure to respond.

Deduction of Wages from Employee Paychecks

Prior to the new regulations, an employer could lawfully deduct wages from an employee's paycheck when, for example, the employer and employee entered into a cash advance repayment agreement, the cash advance was to be repaid through payroll deductions until the amount was repaid, the same amount was to be deducted each pay period, and the agreement allowed for voluntary withdrawal for the deduction.

The new regulations require more for such agreements to be enforceable under the IWPCA. Wage deduction agreements must now specify a "defined duration" of time for the deductions, not to exceed six months. Thus, employers should no longer solely indicate, for example, that "the agreement remains in place until the amount is repaid;" rather, and for example, employers should specify a defined duration (e.g., next six pay periods, beginning May 1 and ending July 31, etc.) to indicate the exact period in which the deductions from the employee's paycheck will occur.

New Enhanced Penalties for IWPCA Violations

The new regulations provide that if the IDOL determines an employer violated the IWPCA because the employer owes wages or final compensation (defined under the IWPCA to include, among other things, expense reimbursements) to the employee, damages will no longer be assessed at 2 percent of the amount owed. Now, damages will be assessed at 5 percent of the amount owed, multiplied by the number of months between when the violation occurred and when the employer pays the amount owed.

Accordingly, employers should exercise caution in denying reimbursement expenses, especially in the absence of a written policy delineating such reimbursable expenses, and especially if there is a good faith basis to deem the expense request reimbursable under the new five-factor test.

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.