Compensation Issues:

Expense Reimbursements, Fringe

Benefits, and the Texas Payday Law

William T. (Tommy) Simmons

Attorney at Law
tsimmons@employmentlawadvisors.com
www.employmentlawadvisors.com

1
Useful Internet Sites
 Texas Workforce Commission:
www.twc.state.tx.us
 U.S. Department of Labor:
www.dol.gov
 EEOC: www.eeoc.org
 IRS: www.irs.ustreas.gov
 TABCC: www.tabcc.org

2
 Fringe Benefits - Taxability
 Fringe benefits such as paid leave and paid
holidays are taxable only after being used,
not when accrued
 Benefits that are forfeited are non-taxable
 Any benefits that are a component of the
employee’s regular rate of pay, such as in-
kind wages, are taxable along with other
wages
 Not included: pre-tax benefits such as certain
types of flex accounts
3
 Reimbursement of
Employees’ Expenses
 Employers may choose to deduct as
business expenses any reimbursements to
employees for business-related expenses
 That would not apply to reimbursements for
personal, non-work related expenses
 Both types would be includable in the
employee’s gross income for personal
income tax purposes

4
Unreimbursed Expenses
 Employers do not have to reimburse employee’s
out-of-pocket business-related expenses
 However, employee must be allowed to deduct
such expenses as itemized deductions
 Most employers reimburse such expenses
 Careful with minimum wage issues!
 Don’t force employees to pay business costs if it
takes them below minimum wage
 Reimbursements generally don’t count toward

MW or OT – see part 778 of W/H regulations

5
Expense Reimbursements
 General rule – IRS Treas. Reg. 1.62-2(c)
 Expense reimbursements are taxable as
part of gross income for employees
 Exception: if reimbursements are made
pursuant to an “accountable plan”, the
payments are not included in gross income

6
Expense Reimbursements - 2
Accountable plan criteria (IRS rule 1.62-2(c)(5)):
 reimbursements can only be made for business

expenses incurred by the employee in connection with

the performance of the employee's duties;
 the plan must require employees to substantiate their

expenses within a reasonable period of time (within 60

days after expense is incurred); and
 the plan must require employees to repay any

reimbursements which exceed substantiated expenses

within a reasonable period of time (within 120 days after
expense is incurred).
 rule includes an expense advance made within 30 days

of when an expense is paid or incurred.

7
 Expense Reimbursements -
General Policy Advice
 Set clear written policy stating what will be
reimbursed, under what conditions, and
when, and have employees sign it
 Same thing for expenses that will not be
reimbursed – careful with FLSA!
 Larger expenses should require authorization
 Require receipts
 Auditing by someone other than employee
 Employment at will – policy can be changed
8
Meals and Travel
 Usual case: reimbursement based
upon actual costs and receipts
 Per diem (federal meal/incidental
expense rate)
 FLSA issue: if per diem is larger
than reasonably necessary, excess
must be included in employee’s
“regular rate”

9
Meals and Travel - 2
 “Accountable” plan:
 Employees paid expenses while on
business
 Must adequately account for expenses

w/in 30 days of return or date of cash

advance
 Must return any excess reimbursement

or advance w/in 30 days of return or

date of cash advance
 “Non-accountable plan” –
reimbursements that do not meet those
10
criteria
 Adoption Costs
 Adoption costs paid in conjunction with an
adoption assistance program may be
excluded from employee’s gross income up
to $5000, or $6000 for a “special needs” child
 If no program, employee can take personal
deduction for such expenses
 Included: everything associated with or
necessary to the adoption process

11
Education Costs
 Many companies reimburse at
least some educational expenses
to increase skill levels and attract
and keep qualified employees
 Only actual costs of schooling may
be deducted – excess stipend is
taxable income for the employee
 Dollar value of paid leave may not
be deducted
12
Life Insurance Costs
 Employers may give employees up
to $50,000 per year in life
insurance without having to include
the premiums in gross income of
employees
 Above $50,000, tax must be paid

13
 Uniform Costs
 Required uniform costs may not be included
in employees’ wages – deductible by ER as
business expenses
 FLSA issues:
 No deductions below minimum wage for
uniforms or uniform cleaning costs, if specific
uniform is required
 Deductions below MW allowed if uniforms are
furnished for employees’ convenience
 Texas Payday Law issue: written
authorization!
14
Miscellaneous Deductions
Allowed for Companies
 Payments for social events for
employees held as reward for
productivity
 Honoraria for speakers for
employees
 Corporate payments to relocation
services to assist employees in
transferring to new locations

15
Disallowed Deductions
 Personal flying lessons for executives
 Vehicle expenses for car used for executive’s
personal convenience
 Reimbursements to employees for losses on
personal investments
 Safari trips by executive to schmooze with
customers
 Payments for fraternity dues for executive’s
own children

16
Texas Payday Law - Basics
 pay employees in full and on time on
regularly-scheduled paydays
 pay non-exempt employees at least
twice per month; pay exempt employees
at least once per month
 final pay: layoff or discharge - within 6
calendar days; resignation - by the next
regularly-scheduled payday
 fringe benefits enforceable if promised in
writing

17
Pay Agreements
 verbal or written
 hourly, daily, weekly, monthly, piece,
job, book, or commission rates, or a
combination of those
 the more complicated the arrangement
is, the more important it is to put it in
writing
 careful with salary offers!
 methods and rates of pay may be
changed, but never in such a way
that a retroactive pay cut results
 may include fringe benefits
18
Texas Payday Law
 Three categories of allowable
deductions: court-ordered payments
(garnishment for child support)

 deductions required by state or federal

law (payroll taxes, IRS tax levies, student
loan repayment wage attachments)

 deductions made for a lawful purpose

and authorized by the employee in
writing

19
Texas Payday Law
Deductions from pay – put another way:
 deductions do not have to be authorized in
writing by the employee if they are ordered
by a court (child support), or else are
required by law (payroll taxes, etc.)
 deductions made for any other reason
must be authorized in writing by the
employee
 have all employees sign wage deduction
authorization forms listing all reasons you
are likely to ever need to deduct pay
20
Wage Deduction Authorization Form
I, ___________, hereby certify that I understand and agree that
from time to time, my employer may deduct money from my pay
under the following circumstances:
1. 5.
2. 6.
3. 7.
4. 8.
I agree that my employer may deduct money from my pay under
the above circumstances.
Signed: _________ Date: _________
 Payday Law Hall of Shame
 Employer had to pay $896 to an ex-
employee in prison – no deduction for
embezzlement had been authorized
 Employees get paid twice for loans,
wage advances, and wage
overpayments
 Employers have to repay employees
when their deduction agreements are
not specific enough
Texas Payday Law –
Miscellaneous Rules
 wage payments in kind must be
authorized in writing by the employee
(meals, lodging, and other facilities -
keep exact records as required by DOL
regulation 531.27!)

 wage payments by EFT must be

authorized by the employee in writing

 fringe benefits are payable only if

promised in a written policy or
agreement - payable as promised - if
policy is silent, benefit is not enforceable
under the Payday Law 23
Texas Payday Law –
Fringe Benefits
 fringe benefits are defined as:
“vacation pay, holiday pay, sick
leave pay, parental leave pay, or
severance pay owed to an
employee under a written
agreement with the employer or
under a written policy of the
employer.”
Section 61.001(7)(B)

24
 Fringe Benefits - 2
 Since these are optional benefits,
the employer can put whatever
conditions it wants to on their use
 Whatever is in the written policy or
agreement will be enforced
 Common to all types of paid leave:
it is not counted as “hours worked”
for either OT pay or FMLA
purposes (1250-hour requirement)

25
 Vacation Benefits
 One form of paid leave – should be
reserved for use for personal
business
 Company can require that it be
taken at the mutual convenience of
the employee and the company
 Company can change rules for
accruing and taking vacation leave,
but should give advance notice of
changes
 Can be used during FMLA leave
26
Vacation Benefits - 2
 Address the issue of what happens
to accrued balances when an
employee leaves the company, or
when a certain date arrives
 Conditions on payouts of accrued
leave can be used to achieve other
purposes, such as encouraging
advance notice of resignation

27
Sick Leave Benefits
 Another form of paid leave –
should be reserved for use for
medical conditions
 Company can allow employees to
use it for illnesses of others
 Company can change rules for
accruing and taking sick leave, but
should give advance notice of
changes
 Can be used during FMLA leave

28
Parental Leave Benefits
 Another form of paid leave – should be
reserved for use for parental bonding
situations
 Can be used for maternity leave, but sick
leave could also be used for that
 Company can change rules for accruing
and taking parental leave, but should
give advance notice of changes
 Can be used during FMLA leave

29
Paid Holiday Benefits
 Lots of companies allow employees to
take holidays off, but not all pay for such
days
 To address needs of minority groups,
many companies have a few “core”
holidays and then some additional
floating holidays that are sometimes
called “personal days”
 Company can require that the day before
or the day after be worked, or else a
vacation day used up
 Difficulty: non-eight hour shifts
30
Severance Benefits
 Severance pay is usually based on a set
formula, such as length of prior service
 Employer has previously obligated itself
to make such a payment
 Enforceable under the TPL if promised in
writing
 Installment payments can be made – up
to employer to determine amount and
duration
 Not the same as wages in lieu of notice

31
 Leave Benefits Policies
 amount accrued each month/year;
 whether leave can be carried over from year to
year, and if so, how much;
 what approval is needed to take leave;
 how much advance notice is needed to take leave;
 return to work status reports;
 what happens when paid leave runs out, but the
employee is still on leave;
 whether paid leave advances will be granted, and if
so, under what circumstances and with what
repayment obligations;
 what happens to accrued leave balances when an
employee leaves the company
32
 Fringe Benefits - Tips
 Adopt a clear set of written policies and stick to
them
 Limit carry-over of leave to a week or so
 Use the benefits as a "carrot" - condition leave
payouts or severance pay on furnishing of a certain
amount of advance notice of resignation, i.e.,
unused leave is forfeited upon work separation
unless certain conditions have been satisfied
 Include repayment of leave advances as an item in
the wage deduction authorization agreement
 Condition severance pay on the employee meeting
certain criteria
 Allow flexibility on the severance pay timeline
33
 Texas Payday Law
Claim Procedures
 nothing happens until the claimant files
a claim
 claim notice sent to employer with 14-
day response deadline
 investigation by claim examiner
 preliminary wage order determination
with 21-day appeal deadline
 appeal hearing with hearing officer
 motion for rehearing within 14 days, or
else appeal to court within 30 days
 court appeal is decided by a judge, not
a jury
34
Compensatory Time
 comp time for salaried exempt employees
is OK
 Best to avoid strict hourly accounting –
use ranges
 Remember: main concern with salaried
exempt employees is that they get a job
done, not that they work a certain number
of hours
 Could be viewed as equivalent to
vacation pay under TPL, so be careful!

35
 Thanks for your attendance
and
Good Luck!
Remember the toll-free hotline for
employers:
1-800-832-9394
tsimmons@employmentlawadvisors.com