Dear Informer

Pay for meals or risk crabby staff, Informer says

DEAR INFORMER: I reimburse my employees for some expenses when they travel on business, such as air fare or mileage and lodging, but not for meals. One of my staff members has challenged this, saying it’s illegal. Is he right?

DEAR EXPENSES: No, he’s not right on the legality front. “Employers have no legal obligation to reimburse employees for any expenses,” says Loren Viere (VEER-ee), managing partner of KDV accounting firm in Brooklyn Park and St. Cloud.

On the tax  front and on the staff morale front, however, it gets more complicated.

First, let’s look at taxes. An employer can reimburse for any ordinary business expense, Viere says, with caveats.

For example, right now there’s a 37.5 cent per mile cap from the IRS for mileage reimbursement. If employers reimburse more than that it counts as income to the employee, who then is liable for income taxes on it.

For another example, reimbursement for a hotel room has to be an “ordinary and necessary” hotel room. “If they stayed in the penthouse, for example,” says Viere, and were reimbursed for the whole cost, “that might be considered extra income to the employee.”

Employers can deduct 100 percent for hotel rooms, but only 50 percent for meals, Viere says. He speculates that the lesser deductibility might be why this employer doesn’t reimburse for meals. “It depends on the business, but yes, it could be very significant. The loss of 50 percent for some, it could add up to $50,000 a year,” Viere says.

Or this employer might be getting hung up on another rule: If a meal is eaten when an employee is out of town overnight, there’s no question about reimbursing for it and getting a tax deduction for it.

But, if this employee went somewhere just for the day, and ate at a restaurant alone rather than with clients or suppliers where business was discussed, it’s not considered a business expense. The employer could still reimburse, but could not deduct the expense, and the reimbursement would count as income for the employee.

So much for the fine print. The bigger issue is that this employer now has a disgruntled employee, most likely talking about his complaint to anyone who will listen. Says Viere: “From my experience, if you’re asking employees to incur a cost, it’s a morale issue if you don’t reimburse them. Normally employees expect to be reimbursed.”

Bottom line: Know the rules so you don’t inadvertently add to employees’ tax burdens or torpedo your own tax deductions. Educate employees about your travel policies so they know what to do and how they’ll be paid. But do pay employees back for business expenses, or you’ll have a lot of unhappy people running around the country on your behalf.

Loren Viere, KDV: 763.537.3011;****@*dv.com“> lv****@*dv.com; www.kdv.com

COMPENSATION

DEAR INFORMER:I’ve been reading about the controversy over new rules governing overtime pay. What do I need to know about them?

DEAR OVERTIME: The Department of Labor did indeed change this spring the rules for how employers pay overtime. Employers have to comply by August 23.

The reason you’re hearing so much about the changes, aside from the dispute over whether this is good or bad for workers or bosses, is because the last time these rules changed was 1938, during the Great Depression.

At that time the Fair Labor Standards Act  “was designed to get people back to work. The idea was, if you wanted people to work more than 40 hours, we’ll have a penalty — you’ll have to pay time and a half,” says Larry Morgan, founder of Compensation Directions in Apple Valley.

Now, the new rules will nearly triple the amount employees can make before they may be exempt from earning overtime pay. Any full-time worker earning under $23,660 per year, including “white-collar” employees in that category, will be virtually guaranteed overtime pay. (The old threshold was $8,060.) The folks at Rider Bennett law firm in Minneapolis issued a legal alert to explain the rules.

“Despite the publicity these new rules have generated, their impact might be fairly minor,” write Jessica Pecoraro and Andrew Tanick, of Rider Bennett. “However, the new regulations are likely to have a more significant impact in the retail and restaurant industries, where even managers and assistant managers are often modestly compensated.”

Some employers are raising salaries to meet the threshold salary requirement of $455 per week, to assure that employees will not automatically be entitled to overtime pay, the Rider Bennett attorneys say.

Morgan suggests employers do an audit of employees to make sure people are classified correctly, especially looking at people who make between $23,600-$50,000 a year. “That’s the trickiest group,” he says.

He predicts employers will end up adding some people to the overtime list, and removing some people. “It’s really a mixed bag,” he says.

Larry Morgan, Compensation Directions: 952.210.0742; **********@*****er.net“>la**********@*****er.net;
Jessica Pecoraro, Rider Bennett: 612.335.3956; ********@******aw.com“>js********@******aw.com;
Andrew Tanick, Rider Bennett: 612.340.8907; ******@******aw.com“>ae******@******aw.com; www.riderlaw.com

CREDIT CHECKS

DEAR INFORMER: Tell me more about checking the credit history of a potential customer. Are reference checks really reliable?

DEAR CHECKING:Pam Krank runs The Credit Department in St. Paul, which loans money to individuals and businesses, so she knows a thing or two about human behavior when it comes to credit checks. She writes in to augment an answer about checking credit addressed in a Dear Informer column earlier this year.

“The advice to get a bank reference was excellent: This should always be done but they usually will need the customer’s written permission for the banker to release the information,” Krank says.

However, checking trade references is not a good idea, Krank believes. “The customer will usually list their top three references — companies they must pay on time. Their top suppliers may be paid very well, to keep orders flowing, but it might not be the way the business pays its small vendors.”

References also aren’t a good idea if the prospect is trying to hide the fact that it’s new or has bad credit. Prospects may even provide fake references of friends or relatives to give flattering information, Krank says.

(The Informer is shocked — shocked! — to learn this.)

What to do instead? “Creditors should always pull objective credit information from either Experian or Dun & Bradstreet (Experian is better when checking small companies) to see how the business pays all creditors reporting,” Krank says.

Also, these reports will provide information on public filings, such as bankruptcies, judgments and tax liens,  that would never be uncovered with reference-checking, Krank says.

Pam Krank, The Credit Department: 651.451.0164;  ****@*CD.com“>pk****@*CD.com; www.TCD.com