California Assembly Bill 5, commonly called AB 5, changed how many businesses evaluate whether workers are employees or independent contractors. For employers with drivers, couriers, sales reps, service teams, or other mobile workers, classification matters because employees may be entitled to reimbursement for necessary business vehicle expenses.
California Labor Code Section 2802 requires employers to indemnify employees for necessary expenditures or losses incurred in direct consequence of their job duties. When an employee uses a personal vehicle for work, that can create vehicle reimbursement obligations.
Quick Answer: How Does AB 5 Affect Vehicle Reimbursement?
AB 5 and California’s ABC test can affect vehicle reimbursement because a worker classified as an employee may be entitled to reimbursement for necessary business expenses, including personal vehicle use for work.
Employers should review whether California workers are properly classified, whether they use personal vehicles for job duties, and whether the company’s reimbursement method reasonably covers required business vehicle expenses under California Labor Code Section 2802.
What Is California AB 5?
California AB 5 codified the ABC test for determining whether many workers should be treated as employees or independent contractors. Under the ABC test, a worker is generally considered an employee unless the hiring entity can satisfy all three parts of the test.
The California Labor & Workforce Development Agency explains that the hiring entity must show that:
- The worker is free from the control and direction of the hiring entity.
- The worker performs work outside the usual course of the hiring entity’s business.
- The worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed.
California’s current Labor Code Section 2775 reflects this employee-classification framework and includes exceptions and alternative tests for certain relationships. Employers should review classification questions with legal counsel before assuming a worker is an independent contractor.
What About Proposition 22?
Proposition 22 created a separate framework for certain app-based transportation and delivery drivers. The California State Treasurer’s Office explains that Proposition 22 classified drivers for app-based transportation and delivery companies as independent contractors and publishes annual per-mile compensation adjustments for those drivers. For 2026, the published Prop 22 per-mile compensation rate is 37 cents.
How Does AB 5 Affect Vehicle Reimbursements?
AB 5 can affect vehicle reimbursements when a worker who was treated as an independent contractor should instead be classified as an employee. If that worker uses a personal vehicle or commercial vehicle for required job duties, the employer may need to reimburse necessary vehicle expenses.
California Labor Code Section 2802 requires reimbursement for necessary expenditures or losses incurred in direct consequence of an employee’s duties. California also added Section 2775.5, effective January 1, 2026, clarifying that mere ownership of a vehicle does not make a worker an independent contractor. If the worker is an employee, vehicle reimbursement may be required under Sections 2802 and 2802.2.
Employers should not assume that using a contractor agreement or requiring workers to provide their own vehicle eliminates reimbursement obligations.
How Employers Should Review AB 5 and Vehicle Reimbursement Risk
1. Review worker classification
Employers should review whether California workers are properly classified under the ABC test, an applicable exception, or another relevant classification standard. This is especially important for drivers, couriers, field sales employees, service technicians, and other roles where vehicle use is part of the job.
2. Identify required vehicle use
Employers should determine which workers use a personal vehicle or commercial vehicle for job duties. California Labor Code Section 2775.5 clarifies that mere ownership of a vehicle does not make a worker an independent contractor. If the worker is an employee, vehicle reimbursement may be required under Sections 2802 and 2802.2.
3. Review the reimbursement method
Employers should evaluate whether the company’s reimbursement method reasonably covers necessary business vehicle expenses. California Labor Code Section 2802 requires employers to reimburse employees for necessary expenditures or losses incurred because of their job duties.
4. Document the policy
A clear policy should explain who qualifies for reimbursement, which vehicle expenses are covered, how business mileage is documented, how reimbursements are calculated, and how employees should submit vehicle-related expenses.
Should California Employers Use the IRS Mileage Rate?
Many California employers use the IRS business mileage rate because it is familiar and easy to administer. For 2026, the IRS business mileage rate is 72.5 cents per mile for January 1 through June 30 and 76 cents per mile for July 1 through December 31.
However, the IRS mileage rate is a national benchmark. It is not automatically a California-specific reimbursement guarantee. California employers should review whether one national cents-per-mile rate reasonably covers required business vehicle expenses for employees who drive in different territories, at different mileage levels, or with different vehicle-cost profiles.
A single mileage rate may over-reimburse some high-mileage drivers and under-reimburse some low-mileage drivers. It may also miss California-specific cost differences for fuel, insurance, registration, taxes, maintenance, repairs, and depreciation.
Can FAVR Help With California Vehicle Reimbursement?
FAVR, or Fixed and Variable Rate reimbursement, may help California employers create a more accurate vehicle reimbursement method because it separates fixed vehicle costs from variable operating costs.
Fixed costs may include insurance, depreciation, registration, taxes, and license fees. Variable costs may include fuel, oil, tires, maintenance, and repairs. IRS guidance describes FAVR as an allowance that combines periodic fixed- and variable-rate payments and requires the allowance to be based on reasonable, statistically defensible local cost data.
For California employers, that structure can be useful because employees may drive in different regions, face different vehicle costs, and log different business mileage. FAVR can generally support tax-free reimbursement when IRS requirements are met and business mileage is properly documented, but employers should still review California reimbursement obligations, worker classification, and policy language with appropriate advisors.
FAQs About California AB 5 and Vehicle Reimbursement
Does AB 5 require vehicle reimbursement?
AB 5 itself is a worker-classification law. It can affect vehicle reimbursement when a worker who was treated as an independent contractor should instead be classified as an employee. If that employee uses a personal or commercial vehicle for required job duties, California reimbursement rules may apply.
What is the ABC test in California?
The ABC test is used to evaluate whether many California workers should be treated as employees or independent contractors. Under the test, a worker is generally considered an employee unless the hiring entity can satisfy all three parts: the worker is free from control and direction, performs work outside the usual course of the hiring entity’s business, and is customarily engaged in an independently established trade or business.
Does owning a vehicle make a California worker an independent contractor?
No. California Labor Code Section 2775.5 clarifies that mere ownership of a personal vehicle or commercial vehicle does not make a worker an independent contractor. A worker who owns the vehicle may still be an employee depending on whether the classification test is satisfied.
Does California Labor Code 2802 apply to vehicle expenses?
Yes, California Labor Code Section 2802 requires employers to reimburse employees for necessary expenditures or losses incurred because of their job duties. When an employee is required to use a personal vehicle or commercial vehicle for work, vehicle-related costs may need to be reimbursed.
Is the IRS mileage rate enough for California reimbursement?
Not always. The IRS mileage rate is a national benchmark, not a California-specific reimbursement guarantee. California employers should evaluate whether the rate reasonably covers necessary vehicle expenses for employees based on mileage, territory, location, and vehicle-cost differences.
Does Proposition 22 apply to all California drivers?
No. Proposition 22 created a separate framework for certain app-based transportation and delivery drivers. Other California employers still need to review worker classification, required vehicle use, and reimbursement obligations under the rules that apply to their workforce.
Can FAVR help California employers with vehicle reimbursement?
FAVR may help because it separates fixed vehicle costs, such as insurance, depreciation, registration, and taxes, from variable costs, such as fuel, maintenance, tires, and repairs. This can make reimbursement more tailored than a flat allowance or one national mileage rate, but employers should still review California obligations and IRS requirements before adopting a program.
Not sure whether your California vehicle reimbursement policy is keeping up with worker-classification and reimbursement requirements? mBurse can help you compare mileage reimbursement, car allowances, actual vehicle costs, employee locations, and FAVR options to identify where your program may be creating reimbursement gaps or compliance risk.
