In order to fulfill project requirements, there are times necessitating that remote employees travel into the contractor’s site of operations for a meeting, special project, training, performance review, etc. The US Department of Labor, Wage and Hour Division, Fair Labor Standards Act (FLSA) states that the time employees spend commuting from home to their normal place of work before the beginning of the workday and from work back home at the end of the workday is not considered compensable time worked and therefore is not time for which employees must be paid. What if the employer wants to compensate remote employees for this travel time? The available guidance doesn’t seem to say an employer can’t pay an employee for this time, and many employers do, however, should they, and what things should an employer consider?
If an employer chooses to pay a remote employee for this infrequent travel commute time, is it an unallowable cost under FAR 31.205? The FAR doesn’t address the allowability of employers compensating employees for commuting time from home to work. How does the Government look at it? DCAA will probably question it as unreasonable under FAR 31.201-3 from the get-go; however, there appears to be no guidance on this practice yet.
Let’s Back Up in Time
Prior to COVID-19, contractors allowed some employees to occasionally work from home, which is often referred to as “telework” or “work at home.”
During the COVID-19 pandemic in 2020, government contractors allowed some or all its employees the opportunity to work from home or remote because the impact of spreading the disease to others in the worksite was costly. Employees were quarantined out of the office for an extended period of time making them unavailable for project work, and the company incurred significant costs associated with developing policies and procedures, tracking exposures, enhancing computer security protocol, and re-organizing and disinfecting the work-site to minimize the spread of the disease. In addition, employers had to equip their workforce (on very short notice) with computer equipment, access to Virtual Private Network (VPN), and work supplies for employees to be able to get the job done remotely.
So, What Now?
Since 2020, many employees are still working from home. The media is filled with stories of companies of all sizes grappling with the in-office perceived productivity boost vs. remote workforce practicability. To be competitive, employers are seeing greater demand from prospective employees to offer full or hybrid office/remote work options. Current employees also found work life balance was better when they were able to work remotely; therefore, most employers are being forced to consider remote workforce options now that the spread of COVID-19 is reduced.
There are Many Concerns and Questions About Compensating Employees for Travel to the Office. What are We Hearing?
Contractors who have employees who are fully remote (or close to it) may decide that they want to compensate employees for their time from their home to the contractor’s site of operations since the home would be considered their normal place of business. We are not aware of any government regulations addressing this practice. It appears that the FLSA language does not prohibit an employer from paying an employee to travel from their home to work. Likewise, the FAR does not address it as an unallowable cost. While the Government has not really addressed this issue, what are some of the factors a government contractor employer must consider?
As a result of employees being designated as working remotely, consider whether the company has experienced and quantified:
- Savings as a direct result of reduced occupancy costs (reduced square footage needs, no dedicated office for employees, reduced utilities, supplies, etc.)
- A reduction in relocation expenses, since the company can hire remote personnel in hard to fill positions
- A reduction in hiring and training costs due to lower turnover
Contractors who plan to implement a procedure to compensate remote employees for travel from home to the contractor’s site of operations should define and document the following in writing, including but not limited to:
- Definition of a remote worker (worker in the local geographic area and those outside it), particularly a hybrid remote worker
- A written agreement between the employer and employee stating that the employee works remotely and travels from his/her residence (i.e., remote work location) to the office is a personal commute, OR if the employer chooses to pay for the commute, that it is a “business trip” and is compensable time
- Definition of the “office” (i.e., contractor’s site of operations) for a remote employee, especially if there is more than one contractor location in the geographic area
- A timeframe for compensable travel (up to one hour or a certain number of miles)
- Geographic location of the employee:
- Devise agreement of remote worksite
- Establish a requirement to report any planned change in worksite and its potential impact
- Determine if an employee can work from any site they choose
- Decide what happens if the employee decides to move outside the geographic area
- Procedures determining how travel time will be recorded (e.g., direct or indirect) and/or charge numbers
- Definitive conditions pertaining to a remote employee’s travel from home to the contractor’s site of operations, when it will be considered a business trip, and whether the employee will be reimbursed mileage for the travel
- Specification of whether the travel time is counted towards comp time (for exempt employees), overtime (for non-exempt employees), etc.
- Determination of whether the employee will be paid travel time to go into the contractor’s site of operations to attend non-mandatory events (e.g., holiday parties or retirement luncheons)
- A definitive system established to track travel time to the office and any mileage reimbursement
- A requirement for an employee to notify the supervisor when they move or work from another personal location for an extended period
It is crucial that a company define a “remote worker,” which may vary from employee to employee. Defining the parameters of travel time is also important. Is the employer going to compensate an employee for 3 hours of travel time because they had to sit in traffic due to an accident? Is the employer only going to allow for a certain number of miles? This is where contractors can get into trouble when a practice is not clearly defined.
Of course, a written policy may also contain the standard procedure for other travel that is normally reimbursed during an employee’s business day (e.g., travel to a site outside the geographic area, travel to supplier location, travel to another contractor site during the business day, etc.). Will any expected commute time impact those trips?
Should the time be charged direct or indirect? Employers should take a second look at whether the time remote employees spend traveling from home to the contractor’s site of operations is a direct charge to a contract. If an employee is called into work for a meeting related to a direct charge contract and then stays in the office and performs indirect work (e.g., general meeting, training, etc.), this can cause issues with accurate charging, especially if an employee doesn’t complete the timesheet daily or decides that the 30 minutes spent on indirect work is insignificant and charges the entire office visit and travel to a direct charge. If an auditor takes exception to the practice and the Administrative Contracting Officer (ACO) determines that the compensation is unreasonable and therefore unallowable, it would be easier to adjust indirect costs vs. adjusting direct contract costs, especially if the adjustment is to a prior year. If the costs associated with remote employees’ travel time to the contractor’s site of operations is charged to indirect, it will be allocated to the contracts where the direct labor was charged. Therefore, indirect charging may be an easier process to administer.
Companies should also consider that this may be a morale issue to other employees (e.g., manufacturing or assembly) who are required to drive into the contractor’s site of operations every day and aren’t compensated for their commute to the office.
Are there Federal and State Tax Implications?
Does the IRS allow employers to deduct compensation for a remote employee’s travel time from home to the business? Is reimbursement of mileage costs for a remote employee’s travel from home to the office considered an expense reimbursement or taxable income to the individual? In addition, states have different rules on when an individual presence in a state creates a withholding obligation. In at least 15 states, a mere one-day presence in the state can create an individual tax withholding obligation for a non-resident. This may also be a consideration if there are local withholding taxes imposed, particularly if the remote worksite is not subject to local withholding, but the in-person location does have local withholding. What policies and procedures does the contractor have in place with respect to where to source this type of payroll item to state where the work is performed or travel occurs? What tracking mechanism does the contractor have in place to record the location of the work?
These are all questions that an employer needs to research before implementing this practice.
Change to Compensation
Paying an employee for travel from home to the office is likely going to be considered a change in the compensation plan by the Government. Contractors should consider presenting the practice to the ACO for review and seeking comments prior to implementation of the plan. Most likely the ACO will pass it to DCAA to review, and DCAA’s comments may assist a contractor in addressing areas that should be considered in the policy.
While the issue of paying remote employees travel time to the contractor’s site of operations has not been addressed by federal law, there may be state and local law implications that need to be considered. We recommend contractors address these issues with Human Resources (e.g., impact on the entire workforce and pay equity issues), tax advisors (e.g., what is taxable to the employer and the employee), and legal counsel (e.g., impact of labor laws – Federal, State, and Local – and contract requirements) before implementing this practice.
Even after all these considerations, there is always the chance a government auditor can second guess this practice and consider the time to be unreasonable under FAR 31.201-3 and question the costs. It may be a best practice to provide the draft procedure to the ACO for review. Remember, the contractor has the burden of proof when the government cites a cost as unreasonable. Therefore, document what makes your compensation decision reasonable and the resulting amount reasonable based on the marketplace.
Redstone GCI is available to assist contractors in developing accounting policies and procedures, performing mock audits and assessing DCAA audit findings, and aiding in audit rebuttals. Redstone GCI assists contractors throughout the U.S. and internationally with understanding the Government’s expectations in applying the DFARS 252.242.7006 Accounting System Administration Criteria.