Without even knowing it, your company’s car allowance or mileage reimbursement may be violating state labor laws like California Labor Code, Section 2802. It is important to take the time to educate yourself and avoid costly fines or lawsuits.
State labor laws and vehicle reimbursements
Most organizations with employees that drive as part of their job offset travel expenses through either a car allowance or mileage reimbursement. Many state labor laws indemnify employees from any expenses incurred while using their personal vehicles for business.
Employee-friendly states like California, Illinois, Rhode Island, Massachusetts, North Dakota, and South Dakota mandate the full reimbursement of business expenses like cell phones and personal vehicles. There have been many landmark cases against major corporations (e.g. Starbucks, Sysco Foods, Radio Shack) that have resulted in multi-million-dollar fines, and settlements.
The most comprehensive employee indemnification law is California Labor Code 2802(a). This law requires that a reimbursement rate or allowance be quantifiable and accurate. However, few companies devote the time and resources necessary to quantify employee business expenses and match their reimbursement or allowance to these expenses.
Because the COVID-19 pandemic caused so many employees to work from home, for the past year much of the concern around these labor laws has focused on reimbursement of home office expenses, such as mobile phones, high-speed internet, and supplies. However, certain decisions made regarding car allowances and reimbursements during this time have also left some employers vulnerable to labor code violations.
COVID-19 and car allowances / reimbursements
Because so many employees whose jobs typically required driving were working from home, many organizations that paid a car allowance made reductions in that car allowance. Others that paid a mileage rate did not do anything because there were few miles to reimburse.
However, with many of these workers now returning to the road or getting ready to return to the road, it is crucial that employers take a close look at whether their car allowance or mileage reimbursement rate quantifiably covers all business-related vehicle expenses. One oversight during the pandemic has involved failing to take fixed vehicle expenses into account.
In the case of drivers who receive a mileage rate, often these fixed expenses (insurance, taxes, fees, depreciation) remain relatively unchanged whether or not those drivers are accruing mileage. But if the drivers are not driving a lot for business, their reimbursement does not keep up with their overall vehicle expenses. This will always be the case for low-mileage drivers who are reimbursed with a mileage rate.
A car allowance may seem better positioned to handle these fixed costs during times of less driving, but if an organization suspended the car allowance or reduced it too much, employees may have incurred expenses that could rightly be assigned to the employer according to expense indemnification laws.
How to calculate a post-COVID mileage rate or car allowance
Now is an important time to consider how well your company car allowance or vehicle reimbursement policy stacks up against the demands of state labor codes. Make sure to ask the following questions as you seek to evaluate the effectiveness of your current policy:
- What is your car allowance amount or mileage rate based on?
- When was the last time your company reviewed this amount?
- Can you say with confidence that all employee vehicle expenses—including fuel, insurance, depreciation, maintenance, tires, and taxes—are fully being offset?
- Can you say with confidence that all these expenses will continue to be met as employee business travel returns to normal in the coming months?
The answers to these questions could indicate your risk of a labor code violation. If your organization pays a mileage rate, it is especially important to consider whether you have low-mileage employees whose mileage reimbursement might not be high enough to cover fixed vehicle costs. (This is especially a concern if they live in an area with higher-than-average costs.)
If your organization pays a car allowance, remember to take into account the after-tax amount. Consider switching to a non-taxable car allowance in order to reduce overall costs while sufficiently reimbursing employees.
Tax codes vs. labor codes and reimbursements
If you cannot confidently state that your organization disburses a quantifiable and accurate vehicle reimbursement or allowance, then you need to review your policy ASAP. And when you do, make sure you take into account the tax code that went into effect in 2018.
Under the current tax code, individuals cannot write off unreimbursed business expenses for the tax years 2018–2025. In the past, employees deducted business mileage if they received a taxable car allowance or any amount of expenses that exceeded their mileage reimbursement. But they loss that recourse under the tax code.
State labor laws are designed to offer exactly this kind of recourse. Employees can file complaints and lawsuits if they can prove that their car allowance or reimbursement does not cover all vehicle costs. Remember, if you cannot prove that your mileage rate fully reimburses all employees, then you are at risk of violating labor laws in employee-friendly states.
But what about the IRS mileage rate? This rate has typically been viewed as the standard for sufficient reimbursement; however, even before the pandemic, the argument was increasingly being made that the IRS rate does not truly meet the CA Labor Code 2802(a) standards of “accurate and quantifiable.” Don’t assume that, because you are paying the IRS mileage rate, your vehicle reimbursement policy is fine as it is.
Our annual survey found that in 2020, 88% of HR managers received complaints their company's car allowance or reimbursement. And 80% of mobile employees reported that they were negatively impacted by pandemic-related changes made their organization's car allowance or reimbursement policy.
These complaints and concerns suggest that 2021 could be a rocky year for organizations that do not review their business vehicle policies and make adjustments to ensure that they pay quantifiable and accurate reimbursements. Not sure where to start? Try our ultimate guide to vehicle reimbursements.