The Illinois Wage Payment and Collection Act, California's Labor Code Section 2802, and other state labor laws require full reimbursement of employee business expenses. In an inflationary economy this could create problems for your company car allowance policy.
For many years, California has had the strictest and most employee-friendly labor laws in the country. CA Labor Code Section 2802 indemnifies employees from any expenses incurred as part of their job responsibilities. This includes all expenses related to the business use of a vehicle.
As of January 2019, the Illinois Wage Payment and Collection Act (IWPCA) also falls under the category of an expense indemnification labor code. Other states – including Massachusetts, Rhode Island, New York, and the Dakotas – also have labor laws protecting employees from employer expenses when it comes to using a personal vehicle for work.
With gas prices remaining high, with insurance rates rising, and with the prices of new and used vehicles at historic levels, your company car allowance needs an update. Without a review and likely adjustment, that allowance might subject the company to risk of a labor code violation.
States like California, Illinois, and others have what's called an expense indemnification law. An expense indemnification law is designed to ensure two things:
In a nutshell, unreimbursed business expenses effectively lower an employee’s wages. Therefore, in all fairness state legislatures have moved to protect employee wages by dictating full reimbursement of business expenses.
In an inflationary economy, employees' wages are worth less than before, and they face higher expenses than before. That's why company car allowances need to be reviewed and adjusted.
Nine U.S. jurisdictions currently place expense reimbursement requirements on employers:
These codes cover a variety of employer expenses that often go beyond the obvious to include personal items used for work purposes:
When an employee is expected to use his or her own personal equipment to get the job completed, the employee should be properly reimbursed for the business use of personal equipment. The largest expenses derive from the use of personal vehicles. These expenses include the business portion of:
If you have employees operating within California, Illinois, and other employee-friendly jurisdictions, you need to pay close attention to how well your company car allowance meets employee expense needs.
As The National Law Review points out, the California Labor Code, Section 2802 (a), contains essentially the same language as the IWPCA amendment, and California courts have expansively interpreted employer expenses to include personal items (e.g. vehicles, phones, data plans, etc.) used in service of job responsibilities.
Two notable exceptions exist. The Illinois amendment exempts organizations with an “established written expense policy” if an employee fails to comply with that written expense reimbursement policy. Similarly, employers maintaining written guidelines for “necessary” expenditures are not liable for expenses exceeding the expenditure amount—“so long as the employer does not institute a policy that provides for no reimbursement or de minimis reimbursement.”
In other words, the first step to updating your car allowance is to establish written expense reimbursement policies specifying the amounts and requirements for any such reimbursement.
One challenge is that a car allowance is not actually a reimbursement. With a typical car allowance policy, the company does not substantiate the business use of the vehicle by tracking mileage or receipts. This lack of a paper trail renders the allowance taxable and it makes it difficult to prove that the allowance fully covers all business-related vehicle expenses.
With inflation sending vehicle costs higher, companies need to respond by increasing car allowances and avoiding labor code violations. However, this response will be costly and will not resolve the deeper issues.
Switching from a taxable car allowance to a non-taxable vehicle reimbursement could be a sensible solution. This approach would redirect that money currently going to taxes and make it possible to prove that each employee receives a full reimbursement of business vehicle expenses.
If your organization operates in multiple states, it’s wise to go ahead and make sure all employee reimbursement policies uniformly comply with laws like California Labor Code Section 2802 and the Illinois Wage Payment and Collection Act.
If you would like guidance on how to review and amend your organization’s vehicle reimbursement policies, contact mBurse today.