What is your car allowance amount based on? If it’s not based on data, you could be in trouble. You may be overpaying or underpaying. You may face increased attrition rates or productivity losses or even lawsuits.
Why benchmark data is needed for car allowances
The car allowance is an important part of a mobile employee’s benefits package. It protects the employee’s income from the high costs of operating a personal vehicle for work. So a good employer will carefully consider vehicle expense data to supply an appropriate allowance amount, right? Unfortunately, this is not the reality in most companies.
Over the years, our car allowance surveys have consistently found that , only around 25-30% of employers use vehicle expense data to set their organization’s allowance amount. Most respondents said it was a random amount or didn’t know where the number came from or had just based it off of a competitor’s allowance – and how many of those competitors were the same ones who answered, “random amount” or “I don’t know”?
The fact is, how can you determine a fair and competitive car allowance amount if you don't know what your employees' actual business vehicle expenses are or the range of allowance amounts being issued by similarly-sized organizations and organizations in your industry?
Even if you know your employees' typical monthly vehicle expenses, how can you know whether those are appropriately in line with expectations for workers in their areas and in their fields?
Costs of calculating a car allowance without benchmark data
Basing a car allowance off of data serves the interests of both the employer and the employee. Here’s why: the costs of operating a vehicle for work involve a variety of constantly changing factors. An amount that worked yesterday may not work tomorrow. An amount that fits the organization’s budget might be straining the employee’s budget. An amount that works for an employee in one state might not work for an employee in another state.
All of these disparities can lead to problems. Let’s look at each problem and how data can help solve it.
Standard car allowance - overpaying and underpaying
One recent survey found that 77% of respondents had not changed their car allowance in the last ten years. During that period, inflation has risen significantly. A $500/month allowance is now worth only $393/month in 2012 dollars. During that same period, the average price of gas has fluctuated between $1.70/gallon and $5/gallon. In other words, some months, the company might have been overpaying, but other months, it wasn’t paying enough.
But it’s not just chronological cost differences; it’s also geographical cost differences. Gas in California runs more than a dollar higher per gallon than the average price of gas, and the CA gas tax increases every year based on inflation. Insurance rates, personal property taxes, and maintenance/repair costs also run higher in some locations than others. Using a standard, unchanging car allowance to address dynamic and diverse expenses creates inequalities between employees, leading to the next two problems.
Vehicle allowance attrition and productivity losses
If expenses outstrip the car allowance, employees will take steps to protect their financial picture. They may opt for fewer face-to-face meetings and schedule travel in ways that benefit the employee more than the company or the client. Or employees may leave for a job with a more robust compensation plan.
Decreased productivity proves costly over time, as does hiring new employees. Plus, if employees realize the inequalities of their situation, morale will dip, exacerbating the situation. But that pales in comparison to the next problem on our list.
Car allowance lawsuits due to labor code violations
If your car allowance isn’t based on data and underpays some employees, legal consequences could ensue. Some states require employers to indemnify employees from all work-related expenses. Failure to fully reimburse employees for actual expenses can lead to labor code violations, penalties, and lawsuits. If your car allowance isn’t based on data, how can you be sure you are fully covering employees’ expenses?
But state labor codes aren’t the only threat. If the car allowance amount has become insufficient, an employee may reduce car insurance coverage. If that happens and the employee is involved in a work-related accident, the company could end up paying. This is why it is crucial to verify employee car insurance every six months.
Obtaining car allowance benchmark data
To ensure that your allowance is competitive, you need access to allowance amounts paid by both competitors and similarly-sized companies. mBurse can help you obtain this data. (Did you know that in 2020 the median car allowance was a bit under $600 per month?)
More importantly, to ensure that your company car allowance covers employees’ expenses, you need additional data: local gas prices, local car insurance rates, employees’ territory sizes, and the amount of driving employees should be doing to stay productive. This information isn’t hard to obtain, but it may seem prohibitively expensive to boost car allowances.
Tax waste – crucial car allowance data most ignore
Even if you obtain accurate benchmarking data about competitors and vehicle expenses, there’s another bit of data to consider: tax waste.
That $600/month allowance gets hit hard by taxes. Employees are probably taking home somewhere between only $375 and $450 after taxes, and the organization is paying payroll taxes on the $600 as well. Switching to a non-taxable reimbursement plan could mean paying the same or less per month while using eliminated taxes to increase employees’ take-home pay.
Switching to a non-taxable reimbursement plan could save everyone money while fully covering employees’ expenses. Contact mBurse today to find out how to implement a non-taxable plan. Or if you aren’t ready to take that step, ask us for a free report that benchmarks your current car allowance amount to industry standards.