They say don’t mess with Texas, but when it comes to labor law, it's California you have to worry about.
California Labor Code Section 2802 requires employers to properly reimburse employees for all necessary work expenses. But it can be a real challenge to properly reimburse employees because the law is so general:
“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.”
In other words, you have to reimburse employees for any cost incurred for work purposes. Such costs can include vehicle expenses, travel expenses, cell phones—even home Internet service and attorney fees.
One of the biggest and most common expenses arises from the business use of a personal vehicle. It can be a real challenge to find the best way to reimburse vehicle expenses. In 2007 the California Supreme Court in Gattuso v. Harte-Hanks Shoppers, Inc. found four reimbursement methods to be consistent with Section 2802(a), as long as employees are compensated for all the costs incurred in owning and operating the vehicle, including gas, oil, maintenance, tires, insurance, registration, and depreciation.
Method 1: Mileage Reimbursement
This very common approach requires employees to log all business related mileage to be reimbursed at the established mileage rate. Typically the rate used is the IRS mileage rate, an income tax tool based on the previous year’s national average costs for fuel, maintenance, depreciation, and insurance.
The California Division of Labor Standard Enforcement has stated that the IRS rate is a presumptively reasonable estimate. If a company wants to pay less than the current IRS rate, it must be able to prove that the employee’s actual vehicle costs are less. Conversely, if the employee wants a higher rate, they must prove that the actual costs of owning and operating their vehicle exceed the IRS rate.
If your company reimburses mileage at less than the IRS rate, your company is in violation of Section 2802(a)—unless you’ve undertaken the laborious task of proving that employee costs are actually less than the IRS mileage rate.
Method 2: Actual Expenses
The second option for reimbursing business use of a personal vehicle is paying, dollar-for-dollar, the actual expenses. This approach involves tracking the exact costs associated with each employee’s car—fuel, oil, maintenance, tires, insurance, depreciation, registration, taxes—and then matching these costs with business purposes. This method is considered best practice due to its accuray. However, reimbursing actual expenses is so time consuming to implement and manage that employers typically must outsource it.
Method 3: The Flat Allowance
For the sake of simplicity, many companies opt to pay employees a set amount on a regular basis to cover business use of the vehicle. This compensation could take the form of a car allowance, a gas allowance, or a per diem. This approach doesn’t involve any business substantiation or require employees to log business mileage. Once again, however, the employer must be sure that the allowance fully reimburses each employee for the actual costs of operating their personal vehicle. If the allowance falls short, the employer has violated the law.
Method 4: Higher Wages
The fourth option is rarely used. The employer simply pays higher wages to compensate for auto expenses. However, as with methods 2 and 3, the employer must be able to demonstrate that the boost in pay covers all of employee’s business vehicle costs. If utilizing this method your company must communicate the methodology and formula used to calculate and reimburse employees for their personal vehicle expenses.
The bottom line is, your auto allowance policy must fully reimburse the employee for the business use of their personal vehicle. If your program doesn’t, you are in violation of the law, and your employees can recover the difference.
If you suspect you may not be fully compensating or reimbursing employees for their car expenses contact us today.
This blog post does not constitute legal advice. For advice regarding a particular situation, please contact a qualified lawyer.