A company provided vehicle has always been a huge perk. However, recent trends have made it more expensive to maintain a company fleet. Is switching to a car allowance or vehicle reimbursement a better option?
Why company vehicle fleets are becoming too costly for many organizations
The Covid-19 pandemic early on reduced the amount of travel by American workers. Many who typically would drive to make sales calls and meet with clients diverted much of their time to remote calls and videoconferencing. This left many company fleets underutilized, a difficult circumstance when company cars are one of the larger expenses for organizations that offer them.
Although business travel increased as the pandemic ebbed, remote work remains the norm in some industries. And larger trends are undercutting the viability of company vehicle programs. For example, insurance companies over the last few years have increased rates for organizations with medium and large fleets, and for organizations with employees that operate in more than one state.
In addition, vehicle prices have reached record highs over the past two years due to high demand and supply chain shortages, particularly in semiconductors. And now, on top of all this, gas prices are at historic highs across the country, with no sign that they will decrease significantly any time soon.
All of these factors are forcing organizations that offer a company car to consider whether the benefits continue to outweigh the costs. Three main alternatives these organizations could consider are a car allowance, a mileage reimbursement, and a fixed and variable rate reimbursement.
Company car vs. car allowance
Companies that provide a vehicle have typically found this approach preferable to providing a car allowance. This is because a company car provides a huge recruiting advantage, allows the organization to control its image, and contributes to employee morale while avoiding the numerous hidden costs that come with a car allowance.
While a car allowance may seem a less expensive option, since the company no longer pays all the employees' vehicle expenses, the secondary costs really add up. The main issue is that a flat, monthly stipend will leave low-mileage drivers overcompensated and high-mileage drivers undercompensated, undermining productivity and morale.
Employees receiving an insufficient car allowance also have incentives to obtain insufficient car insurance, to maintain their vehicles less frequently, and to drive an older, less expensive vehicle. These tendencies will add substantially to company costs in the long run, especially the first two, since they increase car accident liabilities and productivity interruptions.
Finally, standard car allowances are fully taxable, reducing the take home amount by 30-40% and exacerbating all the other hidden costs of car allowances. In states that require full reimbursement of employee business expenses, organizations that pay a car allowance are often vulnerable to labor code lawsuits.
Company car vs. mileage reimbursement
For companies feeling financial pressure to end their company car program, a mileage reimbursement might seem like a better option than offering a car allowance. A mileage reimbursement is non-taxable if it does not exceed the IRS standard business mileage rate (62.5 cents-per-mile for 2022). So employees get to keep the full amount of the reimbursement.
However, once again, the company not only loses an attractive recruiting tool but also picks up hidden costs and liabilities. Now low-mileage drivers are the ones who get under-reimbursed and high-mileage drivers are the ones profiting. The temptations to reduce insurance coverage, under-maintain a vehicle, or purchase a vehicle that departs from the company's desired image all are relevant.
Labor code violations could loom ahead for companies with low-mileage employees and/or employees that work in expensive regions. Finally, a mileage reimbursement can be an invitation to report extra mileage in order to increase the monthly payment, necessitating an accurate mileage tracking tool.
Company car vs. fixed and variable rate plan
The only employee car reimbursement plan that can suitably replace a company vehicle program is called fixed and variable rate reimbursement, or FAVR. The company still loses an attractive recruitment tool and a high degree of control over what employees drive, but can decrease costs while avoiding the pitfalls of both car allowances and mileage reimbursement plans.
A FAVR reimbursement allows the company to start with a standard, ideal vehicle for the job and build the reimbursement program from there using vehicle expense data for each employee's garage zip code. This way, employees have the incentive to drive a relatively new vehicle and know that their data-derived reimbursement will be sufficient.
The employer can also enforce sufficient employee insurance coverage by factoring in the monthly premium costs into the reimbursement and making continued reimbursement contingent on the submission of each employee's insurance declarations page every six months. Similarly, the reimbursement includes the costs of maintenance for the employee's zip code at the proper intervals.
Most importantly, a FAVR reimbursement is non-taxable and eliminates inequitable payments. No employee is over-reimbursed and no employee is under-reimbursed. Using a transparent data model, a FAVR plan allows each employee to see that their individualized reimbursement is optimized for their vehicle ownership and operation needs.
By pairing a FAVR reimbursement program with motor vehicle record checks and an accurate mileage tracking app (both of which are best practices for company car programs anyway), the employer can reduce driver safety liability and mileage buffering by employees.
Challenges of switching from a company car to an employee reimbursement model
At the end of the day, it is not easy to switch from providing a vehicle to employees to requiring employees to drive their own vehicles. Taking away an amazing perk is a tough sell any day. But with today's record-high vehicle costs and recent increases in auto insurance costs for company fleets, it may not be financially sustainable for many employers to continue offering this generous benefit to employees.
If your organization is considering making a switch, but would like guidance in how to audit your current plan or guidance on how to conduct a switch while retaining employees and their trust, we invite you to read our in-depth, "Everything You Need to Know" guide.
Alternately, contact mBurse today to hear from one of our specialists about how much your company could save by switching to FAVR and how to guide your organization through the process of change.