California, Illinois, Massachusetts, and Seattle have explicit employee expense reimbursement requirements that may affect vehicle reimbursement policies. Other states and jurisdictions may also create reimbursement obligations through wage payment laws, employment agreements, or local rules. Here’s how to evaluate expense reimbursement laws by state and build car allowance or mileage reimbursement policies that reduce compliance risk.
What states require mileage reimbursement?
California, Illinois, Massachusetts, and Seattle have explicit employee expense reimbursement requirements that can apply when employees use a personal vehicle for work. These laws do not necessarily require one specific reimbursement method, such as the IRS mileage rate. Instead, they require employers to make sure employees are reimbursed for necessary business expenses.
The laws listed below show how each jurisdiction approaches employee reimbursement. While the wording differs by state or city, the core compliance question is the same: Does your vehicle reimbursement policy fully and fairly cover the employee’s required business driving costs?
California: CA Labor Code Section 2802 indemnifies employees against expenses incurred in the course of their employment. This includes all expenses related to the business use of a personal vehicle.
Illinois: The Illinois Wage Payment and Collection Act (IWPCA) also falls under the category of an expense indemnification labor code. The state amended its law effective in 2019 to cover all reasonable expenses incurred on the job.
Massachusetts: MA regulation 454 CMR 27.04(4d) requires employers to reimburse all expenses incurred by employees in the course of their work. As in California and Illinois, employers operating in this state must cover all expenses incurred while using a personal vehicle for work.
Seattle, Washington: Seattle Wage Theft Ordinance Seattle’s Wage Theft Ordinance requires employers to pay all compensation owed to employees, including reimbursement for employment expenses. For mobile employees, this may include necessary costs tied to using a personal vehicle for work, depending on the employee’s role, work location, and reimbursement policy.
State mileage reimbursement laws
California's mileage reimbursement law is also known as an expense indemnification law. An expense indemnification law is designed to ensure two things:
- Organizations do not pass on business expenses to employees.
- Employees’ wages are not impacted by the employer’s expenses.
In states and jurisdictions with reimbursement requirements, the goal is generally to prevent employers from shifting necessary business expenses onto employees. For mobile employees, that means vehicle reimbursement policies should be reviewed carefully to ensure they reasonably cover the business use of a personal vehicle.
Mileage reimbursement rates for CA, IL, and MA
Illinois and Massachusetts essentially have the same law as California. This means employers in all three states should offer a mileage reimbursement or car allowance that fully covers costs.
For 2026, the IRS business mileage rate is 72.5 cents per mile. Many employers use the IRS mileage rate as a simple reimbursement benchmark, but it is not the only option. A properly structured Fixed and Variable Rate reimbursement program, or FAVR, may provide a more accurate way to reimburse employees because it can account for fixed vehicle costs, variable driving costs, mileage, and location.
States with mileage reimbursement laws
Several U.S. states and local jurisdictions place expense reimbursement requirements on employers. Some explicitly require reimbursement of necessary business expenses, while others may create reimbursement obligations through wage payment laws, employment agreements, or minimum wage rules:
- California - "all necessary expenditures and losses" incurred for work
- Illinois - "all necessary expenditures and losses" incurred for work
- Iowa - "expenses...authorized by the employer" must be reimbursed within 30 days
- Massachusetts - all "necessary and unavoidable" expenses for work
- Montana - "all that he necessarily expends or loses" in work duties
- New Hampshire - "expenses not paid for by wages...or other means"
- New York - all benefits and reimbursements promised to the employee
- North Dakota - "all that the employee necessarily expends or loses" for work, except for "the ordinary risks of the business"
- South Dakota - "all that the employee necessarily expends or loses" for work
- Washington, DC - "the cost of purchasing any tools required" for the job
- Seattle, WA - "all...business expenses and remote work expenses"
Only California, Illinois, Massachusetts, and the city of Seattle explicitly indemnify employees from expenses in full. The other states have employee-friendly laws that apply to business reimbursements. These laws vary and are worth learning if your business operates in one of those jurisdictions.
Business expenses covered by employee reimbursement laws
Expense indemnification codes cover a variety of employer expenses. Some expenses go beyond the obvious to include personal items used for work purposes:
- Personal vehicles
- Personal cell phones
- Personal laptops and tablets
- Data plans and internet bills
When an employee is expected to use their personal equipment to complete the job, they should be properly reimbursed.
Vehicle expenses covered by state reimbursement laws
The largest reimbursable expenses derive from the use of personal vehicles. These expenses include the business portion of:
- Depreciation of the vehicle's value
- Taxes, fees, registration, license
- Gas, oil, tires, maintenance
- Insurance premiums
Unfortunately, many car allowances do not explicitly cover these expenses. States with strict reimbursement laws do not always play well with traditional car allowances.
Reimbursement laws and car allowances
If your business operates in states with reimbursement laws, pay close attention to your car allowance amount. How well does your company car allowance meet employee expense needs? If you cannot answer the question, that is a problem.
One challenge is that a car allowance is not actually a reimbursement. Under a typical car allowance policy, the company does not substantiate the vehicle's business use by tracking mileage or receipts. This lack of a paper trail renders the allowance taxable. It also makes it difficult to prove that the allowance covers business vehicle expenses.
A stronger policy should define how the allowance amount is calculated, what expenses it is intended to cover, and how the company verifies business use. Without mileage records or another defensible reimbursement method, it can be difficult to prove that a flat allowance fully covers the employee’s necessary business vehicle expenses.
Vehicle Costs, Car Allowances, and Labor Laws
Vehicle costs change over time, and reimbursement policies should be reviewed regularly to make sure employees are not absorbing necessary business expenses. Fuel prices may rise and fall, but insurance premiums, maintenance, repairs, registration, tires, and depreciation can create lasting pressure on reimbursement.
If a car allowance has not kept pace with actual vehicle costs, employers may face increased risk in states or jurisdictions with strict reimbursement rules. A taxable car allowance may also leave employees with less take-home value after taxes, making it harder for the payment to fully cover business vehicle expenses.
To reduce that risk, employers should regularly review their employee reimbursement policies and consider whether a non-taxable vehicle reimbursement program would provide better documentation, stronger compliance support, and more accurate reimbursement for mobile employees.
Not sure whether your car allowance or mileage reimbursement policy is keeping up with state reimbursement requirements? mBurse can help you evaluate employee locations, vehicle costs, mileage patterns, and reimbursement options so you can build a more defensible vehicle reimbursement program.
FAQs About Expense Reimbursement Laws by State
Which states require employee expense reimbursement?
California, Illinois, and Massachusetts have explicit employee expense reimbursement requirements. Seattle, Washington, also has local reimbursement rules. Other states may create reimbursement obligations through wage payment laws, employment agreements, or minimum wage requirements.
Do employers have to reimburse mileage?
Not always by using a mileage rate specifically. Some states require employers to reimburse necessary business expenses, which can include personal vehicle use. Mileage reimbursement is one common method, but employers may also use accountable reimbursement programs or FAVR.
Is the IRS mileage rate required by law?
No. The IRS mileage rate is not required by law for every employer. It is commonly used as a benchmark, but employers may use other reimbursement methods if they properly cover necessary business vehicle expenses and meet applicable legal requirements.
Can a car allowance satisfy expense reimbursement laws?
A car allowance may not always satisfy reimbursement requirements, especially if it is taxable, not tied to business use, or does not fully cover the employee’s vehicle expenses. Employers should document how the allowance amount is calculated and whether it reasonably covers necessary costs.
What is the best way to reduce reimbursement compliance risk?
Employers should review employee locations, vehicle expenses, mileage patterns, documentation practices, and state-specific requirements. A properly structured reimbursement program, such as mileage reimbursement or FAVR, may help improve accuracy and reduce risk.
