Everything you need to know about mobile employee risk.

Our definitive guide to negligent entrustment, general liability, labor code (indemnification) violations and, the tax reform.

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What we’ll cover in this guide

To begin this guide we’ll ask you five questions about mobile employee risk. You may not know the answers to these questions unless you are well read on mobile employee risk or follow our blog.

That’s okay. As you read this guide, keep some of the quiz questions in mind because the answers are interwoven throughout. At the end feel free to take the quiz again.

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CHAPTER :
Mobile employee risk Mobile employee risk

If your organization employs people who drive as part of their job, then your organization faces a phenomenon called mobile employee risk. How do you define these risks? Let’s start by defining mobile employees.

A mobile employee needs a vehicle to fulfill his or her job responsibilities, often working in sales, light service, account management, or merchandising. Mobile employees typically drive thousands of miles annually and often constitute the face of the organization.

Mobile Employees Risk

Who travels to meet face-to-face with clients? Mobile employees. Who makes face-to-face sales calls? Mobile employees. Who delivers services to customers in their homes or workplaces? Mobile employees.

These valuable employees carry a certain degree of risk with. What do we mean by risk? Corporate risk includes any kinds of potential threats to a company’s wellbeing, especially factors that can result in financial loss. Every organization employs a set of practices to manage risk and prevent exposure to losses.

If you have mobile employees working for your company, you need to develop a set of risk management practices specifically tailored to mobile employee risk. What kind of risks are we talking about?

For starters, car accidents. Every time a mobile employee hits the road, you’re exposed—to liability for damages, to lawsuits, to plain old bad publicity.

And then you’ve got labor codes and IRS regulations to consider. How do you know the company is fully complying with the complex system of laws governing the reimbursement of mobile employees?

Speaking of reimbursing employees—if you don’t do it right, you’re also exposed to uncontrollable, escalating costs.

So what do you need to know in order to minimize these mobile employee risks?

Let’s dig in to each one.

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The constant risk of car accidents The constant risk of car accidents

Every year, the National Highway Traffic Safety Administration (NHTSA) produces data on vehicle crashes in the United States. In 2016, police reported an estimated 7,277,000 crashes

That’s nearly 20,000 per day —about 8 accidents every minute.Let that sink in.

When you consider traffic volume, you know that most accidents occur during the workday—when your mobile employees are carrying out their jobs.

It’s not a question of if but when one of your employees causes an accident. But it’s the employee’s fault, not the company’s, right? Well, that depends on how you look at it.

Two of the biggest risks you face involve the twin legal doctrines of vicarious liability and respondeat superior—when an employer is held responsible for the wrong actions of an employee.

When a motorist gets hit by another motorist, they—and their insurance company—want to make sure the other motorist’s insurance company picks up the tab. And if injuries occur, they are probably ringing up a ton of medical bills.

But what if the at-fault driver’s insurance can’t cover all these costs? That’s when the victims—knowing that the driver was on the job, knowing that the driver’s employer has deeper pockets, and relying on the doctrine of respondeat superior—will come after the driver’s employer.

Mitigating your organization's mobile eployee risk

That’s why every organization should have a policy that sets minimum insurance liability limits for all mobile employees—and sets them high. That’s why every organization should also regularly verify each employee’s compliance.

Insurance liability is not the only form of vicarious liability for employee-caused car accidents. There’s another threat: negligent entrustment.

If the victim of the crash can prove that the at-fault driver’s employer was negligent in entrusting that employee with responsibilities that required operating a vehicle, then the victims can sue the company.

All they have to do is convince a judge that the employee was incompetent, reckless, or unlicensed, and that the employer improperly vetted the employee. If the employee had previous incidents on his or her driving record, that could be enough to demonstrate negligence.

This is why every organization with mobile employees should have a comprehensive safety policy. This policy should require routine motor vehicle record (MVR) checks, promote safe driving, and detail a process for addressing incidents that increase a driver’s risk profile.

To reduce liability for employee-involved accidents, it’s important to follow best practices. Let’s look at a few.

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How to reduce general liability for car accidents How to reduce general liability for car accidents

No matter what you do, if you have employees on the road, car accidents will occur within the company. Risk management means protecting the company and the employee from unnecessary financial exposure. Here’s how to do it:

1. Mandate each employee’s minimum car insurance liability limits

Every car insurance policy includes three liability limits that your company should dictate for each employee:

Bodily injury per person: The maximum amount the insurer will pay for a single person’s injuries, per incident.

Bodily injury per accident: The maximum total amount the insurer will pay for all injured persons, per incident.

Property damage: The maximum amount the insurer will pay for all damages to another person’s property, per incident.

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Nearly every state requires these coverage’s, but no state sets them high enough to cover a serious accident involving multiple injuries. California, for example, requires a minimum coverage of $15,000 for bodily injury per person, $30,000 for bodily injury per accident, and $5,000 for property damage—expressed as a 15/30/5 policy

In 2013, however, the Insurance Research Council reported that the average bodily injury claim was $15,443. That means half of all bodily injury claims exceed California’s minimum requirements. Very few states require anything beyond a 25/50/15 policy—fine for a fender-bender but not for a serious accident.

If you don’t have a policy requiring a minimum amount of coverage, or your policy merely mandates the state minimum coverage, then your company is a ticking time bomb of risk.

2. Set the liability limits high—and make sure employees can afford the premiums

If you really want to protect both the company and employees, you need to go with a 250/500/100 policy for all employees. The popular 100/300/50 policy is a bare minimum, but it leaves you exposed. An accident that causes over $300,000 in medical claims is rare, but it does happen. With dozens or even hundreds of employees on the road every week, year after year, do the math—a rarity becomes an increasing possibility.

Just make sure that your employees can afford the higher coverage. It’s not right to mandate a higher amount to protect the organization but not bump up the car allowance or reimbursement amount. It also violates the labor code in some states, including California and Massachusetts, if you require coverage that exceeds the state minimum.

3. Verify employee car insurance every six months

An unenforced policy is no policy. Employees may drop coverage or decrease coverage in order to save money. You need to make sure this doesn’t happen.

Since most car insurance policies renew every six months, it makes sense to conduct bi-annual insurance verifications. No matter how good your policy is, employee compliance ultimately determines your risk.

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How to prevent negligent entrustment lawsuits How to prevent negligent entrustment lawsuits

The key to reducing the risk of negligent entrustment is a formal safety policy. Getting your ducks in a row, taking swift action when necessary, and keeping excellent written records is your best protection in the event of an employee-caused accident.

Follow these tips to develop a robust policy:

1. Conduct annual MVR checks

In the case of negligent entrustment, what you don’t know will hurt you. You cannot plead ignorance if an employee causes an accident, and it turns out that employee had previous incidents on his or her driving record

Most organizations check MVRs as part of the hiring process. This is a great practice—but it has to continue on a regular basis. Driving records change over time. In a short period of time, an employee may rack up a couple of speeding tickets, or even worse, pick up a DUI. You have to know as soon as possible that a violation has occurred so that you can take appropriate actions before a serious incident occurs.

Because negligent entrustment lawsuits can cost millions of dollars, some organizations opt for continuous monitoring in lieu of annual MVR checks. This alternative is expensive, but the employer knows immediately when an employee has been charged with a moving violation.

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2. Maintain a risk profile for every employee

Not all incidents that appear on an MVR check are equally severe. Establish a rating system that categorizes employees as low-risk, medium-risk, or high-risk. Update each employee’s score as new information comes in.

Most states maintain a points system to indicate driver safety. The number of points on a driver’s record — hopefully few to none! — can be a helpful indicator. But be aware that different states use different points systems. For example, driving without a license generates 10 points in Texas but only 2 points in California. As a result, you need a points equalization system that translates different state’s points into the company’s internal risk-scoring system.

3. Set clear guidelines for acceptable driving and clear consequences for violations

An employee with a low-risk score needs no correction—just keep checking MVRs for changes. But you need to intervene when an employee has a violation. Interventions could include:

  • a written warning
  • an online driver safety course
  • continuous monitoring
  • behind the wheel training
  • termination

The higher the employee’s risk, the higher the company’s risk. Every company needs to decide what’s an acceptable level of risk, but in our litigious society, it doesn’t take much to establish employer liability.

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4. Keep excellent records.

Maintain a clear written record of all safety policies. Regularly refresh employee understanding. Put all interventions in writing, and update an employee’s risk profile every time a corrective action occurs. If a negligent entrustment suit occurs, these records can prove that you took steps to reduce an employee’s safety risk.

5. Be proactive.

You cannot prevent all accidents, but you may be able to prevent some. The key is to establish clear expectations for safe driving, to reinforce these expectations, and to give consequences for violations.

Mobile employee risk prevention

First and foremost, you must address distracted driving. A 2013 report by the National Safety Council estimated that 27% of car accidents involved distraction due to talking or texting on a cell phone. And 98% of respondents to a 2014 survey agreed that texting while driving is dangerous, yet 74% did it anyway. If three-quarters of the populace texts while driving—even though it’s illegal in 48 states, and everyone knows it’s dangerous—you can bet your employees are doing it.

It is vital that the company not only establish policies that prohibit cell phone use while driving but also that the company creates a culture of compliance. If mobile employees feel pressure to conduct business while driving, they may follow company “practice” rather than company policy.

CHAPTER :
Avoiding labor code violations Avoiding labor code violations

Car accidents may be the most obvious source of risk, but state labor codes pose a more subtle set of risks. Several states have added specific protections to the take-home pay of employees. In these states, employers that don’t fully protect their employees’ pay in accordance with the law can be subject to fines and lawsuits

These “pro-employee” states include California, Illinois, Massachusetts, Rhode Island, North Dakota, South Dakota, Michigan, and New York

No state is stricter than California. If you can comply with California’s labor laws, you’ll be protected anywhere.

CA Labor Code Section 2802(a) states that:
“An employer shall indemnify his or her employee for all necessary expenditures or losses incurred by the employee in direct consequence of the discharge of his or her duties, or of his or her obedience to the directions of the employer, even though unlawful, unless the employee, at the time of obeying the directions, believed them to be unlawful.”

Furthermore, Section 2802(c) defines “necessary expenditures or losses” to include “all reasonable costs.”

California labor law clearly requires employers to reimburse employees for all reasonable expenses related to the business use of a personal vehicle. (Business use does not include the commute between home and work.)

California labor code calculator

These expenses include more than just gas. Tires, maintenance, depreciation, insurance, taxes, and registration all can be considered reasonable costs

So how do you know whether your company is compliant?

The California Supreme Court laid it out in the 2007 decision Gattuso v. Harte-Hanks Shoppers, Inc. According to the Court, the following methods can comply with the law:

1. The IRS mileage rate – paying a cents-per-mile rate set by the federal government each year to guide individual tax deductions for business miles driven.

2. The actual expense method – reimbursing the actual expenses, demonstrated through employee receipts.

3. The lump-sum method – pays a car allowance based on the employee’s personal vehicle expenses; this car allowance must provide full reimbursement.

None of these methods provides a perfect solution, however. Each carries distinct advantages and disadvantages:

Type Pros Cons
Mileage Reimbursement Simple to administer May over-reimburse high-mileage drivers and under-reimburse low-mileage drivers
Actual Expense The most precise method. Administratively difficult; requires tedious record-keeping and tracking receipts
Lump Sum or Allowance Simple to administer Taxes reduce the take-home amount, making this method the most inefficient

Most companies opt for the IRS mileage rate or a monthly car allowance because these are the easiest to administer. However, both create a problem of inequity.

Think about it: different employees experience different costs, yet the employer reimburses them the same amount. Territory size, employee role, and geographically-sensitive costs all differ across a single company.

Not only is a standard reimbursement unfair to the employees with the highest costs, it’s not cost-effective for the company. Compliance with CA Labor Code 2802 means setting a car allowance at the level of the employee with the highest expenses. Similarly, if you pay a mileage rate, high-mileage drivers can drive costs beyond what’s necessary for sufficient reimbursement.

Even worse, inequitable compensation can dampen productivity and increase attrition rates, further increasing company costs and adding overall risk. 

So what’s the solution?

CHAPTER :
Fixed-and-Variable-Rate Reimbursement (FAVR) Fixed-and-Variable-Rate Reimbursement (FAVR)

There’s no perfect way to comply with California’s labor laws, but there’s one approach that comes close: FAVR.

Fixed-and-variable-rate reimbursement divides mobile employee expenses into fixed and variable categories:

Fixed expenses Variable expenses
Insurance Fuel
Depreciation Maintenance
Taxes and registration Tires

The employer then pays a fixed monthly amount plus a variable mileage rate to, all based on cost data for each employee’s territory and garage zip code. This means different employees receive different reimbursement amounts that accurately reflect their reimbursement needs.

Consider the advantages:

  • Non-taxable
  • Controls costs
  • Precise
  • Equitable
FAVR data sheet

Yes, the actual expense method carries each of these advantages as well. But there’s a reason most companies avoid it: the administrative expense of time and energy spent tracking and reporting receipts.

True, FAVR involves greater administrative complexity than mileage reimbursement or a car allowance, but a number of third-party organizations have created cost-effective ways to administer a FAVR program, making it the best option for a company seeking to comply with CA Labor Code 2802.

To learn more about your car allowance and mileage reimbursement options we recommend everything you need to know about company car allowances and mileage reimbursements

CHAPTER :
Tax Risk Tax Risk

Adopting a FAVR plan can also help protect your company from some of the risks associated with our country’s complex tax code.

What kind of risks are we talking about?
1. Failure to properly withhold taxes from a car allowance.
2. Failure charge back an employee for personal use of a company vehicle.
3. Failure to charge back an employee for personal use of a company fuel card.

To understand these risks and how to avoid them, it helps to distinguish between two IRS categories for employee reimbursement:

Accountable Plan

A reimbursement requiring employees substantiate the business connection of an expense within a reasonable amount of time. Employees must pay back any excess advances in a reasonable amount of time. An accountable plan is non-taxable.

Non-Accountable Plan

A payment that does not require employees to substantiate business connection of an expense. Any non-accountable amounts are considered income to the employee and must be included as wages with appropriate tax withholdings.

If your organization uses a non-accountable method such as a car allowance, you need to make sure that you are properly withholding taxes each month from employees. An employee in the 32% tax bracket receiving a $600/month allowance could have as much as $238 withheld for federal income taxes and FICA. And don’t forget that the company needs to pay its share of FICA (7.65%) on that amount.

The tax waste generated by a non-accountable plan can be massive, making the extra time spent administering an accountable plan worth it.

But even an accountable plan can generate taxable income. If an employee doesn’t pay back excess advances, then the employer needs to tax the excess as income.

Many employers avoid all of this by simply paying the IRS mileage rate, since it is considered non-taxable. (If the mileage rate exceeds the IRS rate—58 cents/mile for 2019—then the difference is taxable.)

However, as we saw above, the IRS rate creates inequities and uncontrollable costs.

Once again, the best practice to reduce tax risk would be to adopt a FAVR plan. It is an IRS-approved method to deliver non-taxable reimbursement while controlling costs and avoiding chargebacks to employees for excess payments.

Speaking of taxes, you may be wondering how the new tax code—formally known as the Tax Cuts and Jobs Act of 2017 (TCJA)—will affect things.

Let’s take a look.

CHAPTER :
How tax reform impacts risk How tax reform impacts risk

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The biggest tax reform in 30 years was passed December 22, 2017. The TCJA lowered taxes for both individuals and businesses starting in 2018. But it also seriously impacts business reimbursements.

Previously, when filing taxes, a mobile employee could deduct any unreimbursed business expenses on Schedule A, after calculating these expenses on Form 2106. This always meant that an employer could say, “Just write it off on your taxes,” if the allowance or reimbursement plan didn’t completely cover travel expenses.

But the TCJA has eliminated that deduction until 2025. For the next seven years, employers must make sure that they fully cover employee’s business expenses, or else….

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Or else what?

For starters, it’s unfair not to fully cover these expenses. But that’s not the only issue at stake. Because labor laws in states like California and Massachusetts require full reimbursement, any organization that was relying on the tax deduction loophole will now be exposed.

Employees who were content to just file for a hefty tax deduction will seek to protect their income one way or another. They may drive less to save money (if they receive a car allowance), or they may report extra miles to increase their reimbursement (if they receive a mileage rate). Or, if they work in CA or MA, they may just file a labor code complaint or a lawsuit.

Or they might just leave for a company that does fully reimburse its employees.

The 2017 tax reform opens up a new set of tax risks, and it’s vital that your organization take a close look at its car allowance or reimbursement policies.

Once again (at the risk of sounding like a broken record), we recommend that you consider adopting a FAVR plan to ensure full reimbursement of all employees without losing control of costs.

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Conclusion Conclusion

While there’s no failsafe way to protect an organization from mobile employee risks, there are many concrete steps you can take to reduce risk. Take stock now. Review the recommendations on this page. Commit yourself to adopting at least one in the next month.

But don’t stop there.

Remember that car accidents will happen, and the 2018 taxes will be due before you know it. If you wait to take action, what will the consequences be?

It's time to get serious about mobile employee risk.

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