Yes, this kind of thing can be implemented nicely using a rule engine, and (in my unbiased opinion) Jess would be an excellent choice. As I think you suspect, using a rule engine would let you keep individual policies separate and individually understandable: for example, you could have one rule for transportation allowance for less than one day of overtime, another rule for transportation for more than one consecutive day, other rules for meal allowances, etc. Jess would let you easily integrate this into any Java application.
I'd be a little nervous about saying that rule changes wouldn't go through your normal SDLC process, however. Rules are software like any other, and rigorous testing is required just as for any other software.