It's official – as of July 1, 2019, California drivers will be buying gas at $1 above the national average per gallon. This recent gas tax increase will create new challenges for employers under CA Labor Code 2802(a), the strictest labor law in the United States.
How the gas tax will clash with CA Labor Code 2802(a)
When the California legislature passed a gas tax increase of 5.6 cents per gallon, it set off a ripple effect for both drivers and businesses. California residents already were paying some of the highest gas prices in the country. Now, with an average price of $3.755/gal, they will pay more than a dollar a gallon higher than the national average.
But the cost won't just be felt by individual wallets. Businesses that employ people who drive as part of the job will face significant consequences. Under California's labor code, Section 2802(a), employers are required to fully reimburse all reasonable expenses incurred by employees in fulfillment of their job responsibilities.
This employee indemnification code means that any organization with employees operating vehicles within the state of California must fully reimburse all vehicle costs, from auto insurance, to depreciation, to, yes, fuel. In other words, in order to comply with the labor law, employers will need to cover the gas tax increase 100% for any business-use purchase of fuel by employees.
Isn't paying the IRS mileage rate compliant with CA Labor Code 2802(a)?
In theory, the IRS standard business mileage rate complies with California's strict employee indemnification law. But in practice, if employees can demonstrate that the mileage rate ($.58 per mile for 2019) does not fully cover their vehicle costs, then the law is on their side.
The California gas tax hike now increases the likelihood that employees will complain of labor code violations. The price of nearly everything is higher than average in California. But the IRS standard mileage rate is based on an average of vehicle costs across the U.S. for the previous year. So already it's likely that some California business drivers already experience higher costs than the IRS business rate can fully reimburse.
But add the increase in gas tax, an increase of $.75 to $1 more per fill-up, and the existing problem only worsens. The IRS is not going to increase its business mileage rate until January 2020, and even then, the rate will be based on the average vehicle costs across the entire U.S. for 2019, not California's vehicle costs.
It is unlikely, going forward, that paying the standard government mileage rate will keep California employers compliant with CA Labor Code 2802(a). Plus, using the IRS standard rate for mileage reimbursement creates a number of significant long-term problems.
CA Labor Code 2802(a) isn't the only problem with the California gas tax
The 2019 gas tax increase won't just clash with California labor laws. It will also expose the inadequacy of most vehicle reimbursements and car allowances paid by organizations that operate in multiple states besides California.
Let's say your company has sales reps operating in both California and Texas. In California, they are now paying a gas tax of $.47 per gallon. The ones in Texas are paying ... $0 per gallon in taxes. Due to other price factors, motorists in Texas pay an average of $2.49 per gallon for gas in July 2019 (source: AAA). That's well over $1 less per gallon than California motorists.
If your company pays the same car allowance or mileage reimbursement rate to both sets of sales reps, is that fair? Chances are, either the California reps are getting under-reimbursed, or the Texas reps are getting over-reimbursed – or both!
As we like to say at mBurse, equal isn't equitable or fair. Paying the same amount or rate to offset unequal expenses isn't fair to employees or to the company.
How to comply with CA Labor Code 2802(a) AND pay equitable reimbursements
The July 2019 gas tax hike should serve as a wake up call to employers with California-based employees. Now is the time to adopt a vehicle reimbursement policy that ensures both labor code compliance and equitable, cost-effective payments.
Paying a taxable standard car allowance is not the best option here. Anywhere from 30 to 40 percent of the monthly payment is going to federal and state taxes for the employee. Plus the company is also on the hook for payroll taxes, since a standard car allowance is considered taxable income. Boosting an already overly-expensive and unfair allowance to account for the gas price increase is not a wise investment due to the tax waste.
Switching to the tax-free IRS mileage rate is not a great idea either, for reasons explained above. Companies already paying that rate need to reconsider.
It should be evident that employees in California should be receiving a higher mileage rate than employees in other parts of the country. And that's the key here – calculating the optimal rate for California-based drivers.
In part two of this blog, we'll look at two ways to deliver a fair reimbursement rate to California drivers that will comply with the employee indemnification labor laws. In the meantime, take this opportunity to estimate your California employee vehicle expenses and compare these to what your current car allowance, mileage reimbursement, or fuel reimbursement delivers.