California has set the bar high when it comes to preventing employers from passing along expenses to employees. Under California labor law 2802, employers are required to reimburse employees for all necessary work-related costs. Here's a quick overview of CA Labor Code Section 2802 and four ways employers can comply with the law.
Quick Answer: How Can Employers Reimburse Vehicle Expenses Under California Labor Code 2802?
California Labor Code Section 2802 requires employers to reimburse employees for necessary expenses incurred while performing job duties. For employees who use a personal vehicle for work, that can include fuel, insurance, maintenance, depreciation, registration, taxes, and other vehicle-related costs.
Employers commonly evaluate four reimbursement methods: mileage reimbursement, actual expense reimbursement, a vehicle allowance, or higher wages. Each method must be structured carefully enough to cover necessary business vehicle expenses.
What does Section 2802 require of CA employers?
California Labor Code Section 2802 requires employers to reimburse employees for all reasonable and necessary work expenses:
“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.”
The costs considered reimbursable cover a wide range:
- vehicle expenses (fuel, insurance, depreciation, taxes, maintenance)
- travel expenses (airfare, lodging, rideshare or taxi)
- cell phone plans and home internet service
- home office expenses (printer/scanner/fax, paper, shredder, etc.)
This post will focus on reimbursing vehicle expenses.
How should employers reimburse vehicle expenses in California?
It can be a real challenge to find the best way to reimburse vehicle expenses. Under California reimbursement law, 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.
Note: California is not the only state to indemnify employees from work expenses. If you have any employees in one of the states listed below, take a few minutes to determine whether your current vehicle reimbursement method works for that state.
4 Methods to Reimburse California Employees
The four approved ways to reimburse vehicle expenses, according to Gattuso v. Harte-Hanks, are:
Method 1: Reimburse Business Mileage
This approach reimburses employees by multiplying approved business miles by a cents-per-mile rate. Many employers start with the IRS business mileage rate because it is familiar, easy to calculate, and commonly used as a reimbursement benchmark.
For 2026, the IRS business mileage rate is 72.5 cents per mile for business miles driven January 1 through June 30 and 76 cents per mile for business miles driven July 1 through December 31.
In California, employers should remember that the IRS rate is a benchmark, not a guarantee. If a mileage rate does not adequately cover the employee’s necessary business vehicle expenses, the employer may need to evaluate a different reimbursement method.
Method 2: Reimburse Actual Vehicle 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.
The actual expense method is often considered best practice due to its accuracy. However, reimbursing actual expenses is so time-consuming to implement and manage that employers typically must outsource it to a third party.
Method 3: Pay a Vehicle Allowance
Some companies pay a flat vehicle allowance, gas allowance, or per diem to help offset vehicle costs. This approach can be simple to administer, but it poses a risk if the payment is not supported by business-use documentation or if the after-tax amount does not fully cover the necessary business vehicle expenses.
In California, employers should review whether a flat allowance is sufficient for each employee’s business driving costs. If the allowance falls short, the company may face reimbursement and compliance risk.
Method 4: Pay 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 the 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.
FAVR as an Alternative Reimbursement Method
FAVR, or Fixed and Variable Rate reimbursement, can help employers reimburse vehicle expenses more accurately by separating fixed costs from variable costs.
Fixed costs may include insurance, depreciation, registration, taxes, and license fees. Variable costs may include fuel, maintenance, tires, oil, and mileage-based operating expenses.
Because FAVR can account for mileage, location, and vehicle-cost assumptions, it may help California employers reduce overpayment and underpayment risk compared with one flat allowance or one national mileage rate. FAVR can also support tax-free reimbursement when IRS requirements are met and business mileage is properly documented.
FAQs About California Labor Code 2802 Vehicle Reimbursement
What does California Labor Code 2802 require?
California Labor Code 2802 requires employers to reimburse employees for necessary expenses incurred while performing job duties. For employees who use a personal vehicle for work, that can include fuel, insurance, maintenance, depreciation, registration, taxes, and other vehicle expenses.
What are the four ways to reimburse vehicle expenses under California Labor Code 2802?
Employers commonly evaluate mileage reimbursement, actual expense reimbursement, a vehicle allowance, or higher wages. Each method must be structured carefully enough to cover necessary business vehicle expenses.
Is the IRS mileage rate enough for California employees?
The IRS mileage rate is often used as a reimbursement benchmark, but it may not be enough for every California employee. Employers should review whether the rate covers necessary business vehicle expenses based on mileage, location, insurance, fuel, depreciation, and other costs.
Can employers use a car allowance in California?
Employers may use a car allowance, but they should verify whether the payment fully covers necessary business vehicle expenses. If the allowance is taxable, employers should review the after-tax value employees actually receive.
Can employers reimburse actual vehicle expenses?
Yes. Employers can reimburse actual expenses such as fuel, insurance, maintenance, depreciation, registration, and taxes. This method can be accurate, but it requires detailed records and administrative controls.
Can FAVR help with California vehicle reimbursement?
FAVR may help employers reimburse more accurately by separating fixed vehicle costs from variable vehicle costs. It can account for mileage, location, and vehicle-cost assumptions, and it can support tax-free reimbursement when IRS requirements are met and business mileage is properly documented.
Not sure whether your California vehicle reimbursement method is covering necessary business expenses? mBurse can help you compare mileage reimbursement, actual expense reimbursement, vehicle allowances, higher wages, and FAVR to identify where your program may be creating reimbursement gaps or compliance risk.
