Why Your Auto Allowance Policy May Violate CA Labor Code 2802(a)
Under California Labor Code section 2802(a), employers must fully reimburse employees for all expenses actually and necessarily incurred as part of their job. If your organization has employees that work in the state of California and drive personal vehicles for work purposes, it is important that you understand what constitutes an expense and how to appropriately reimburse all expenses. If an employee can show that your organization has failed to reimburse them adequately, it will prove a costly mistake.
Consider the following reasons why a travel reimbursement policy might fall short of CA Labor Code Section 2802(a):
- Your reimbursement rate is arbitrary.
Many employers set a reimbursement rate that they assume will cover all expenses and then hire employees at that rate. However, an employer that arbitrarily sets the reimbursement rate before hiring faces a danger: an employee may later pursue a legal claim that the established rate does not accurately reflect the expenses actually incurred. Remember, expenses can include not only gas and maintenance but also depreciation, insurance, and repairs—and these expenses will not necessarily track with the number of miles driven.
- You compensate using a flat car allowance.
A flat car allowance often fails to address the ever-changing expenses of a mobile employee. It may not keep up with gas prices, it may not reflect the territory sizes of all employees, it may not adequately address depreciation, which increases with inflation costs. As cars increasingly serve as the offices of employees, car allowances must have the flexibility to keep up with increased travel and increased expenses.
- The IRS standard rate can prove insufficient.
Many employers use the IRS mileage rate, assuming that it will more than cover driving expenses. And it often does. The IRS standard mileage rate is not arbitrary and is based on an annual study of the fixed and variable costs of operating an automobile, including depreciation, insurance, repairs, tires, maintenance, gas and oil. The Division of Labor Standards Enforcement has stated that using the IRS mileage rate will generally satisfy the employer’s obligation to properly reimburse for business related vehicle expenses, absent evidence to the contrary. But sometimes an employee does present evidence to the contrary. In that case, using the IRS rate blindly could prove costly.
Consider the costly consequences of non-compliance with CA Labor Code Section 2802(a):
If an employee can demonstrate the IRS mileage rate or the chosen mileage reimbursement rate does not cover all actual expenses the employee has incurred, the employer must pay the difference.
Furthermore, an employee can reach back three years for any expenses incurred in that period. Accrued interest as well as attorney's fees incurred from claims as well as actions to enforce Section 2802 are recoverable and may be awarded by either the courts or the Labor Commissioner to an employee.
If your organization is paying a flat taxable auto allowance, an arbitrary mileage reimbursement rate, or even the IRS rate for California employees, it is probably time for you to review your auto allowance policy. There is a good chance your car allowance policy may not in compliance.
If you would like a free evaluation of your car allowance policy for those employees in the state of California, please contact us today.