Most organizations with employees that operate a vehicle as part of their job offer some kind of vehicle allowance or reimbursement. Because fuel is a significant cost, it raises the question of whether a company vehicle program should factor in the fuel efficiency of the vehicles being used.
Does gas mileage matter for vehicle reimbursements?
The short answer is, it depends on the method of vehicle reimbursement. In the case of a standard monthly car allowance or a mileage reimbursement rate, the more fuel efficient the vehicle, the farther the payment goes for the employee. This is because in each system the rate of payment is independent of how much the employee actually pays for gas per mile.
In the case of a fuel reimbursement or fuel card, the higher the fuel efficiency, the less the company has to pay the employee per mile. This is because the payment directly pays for the fuel costs, unlike methods that pay a standard rate. However, an employer ends up subsidizing an employee's choice to drive a gas guzzling vehicle if the employee so chooses.
The direct relationship between gas mileage and gas cards makes a good argument for limits on how much and how often the employee can use the gas card (same with fuel reimbursement programs).
There are other reimbursement methods, such as fixed and variable rate allowances, that use a standard vehicle to derive reimbursement rates. With these programs, as with policies that pay standard rates, the organization calculates payments without any regard for the fuel efficiency of the employee's vehicle.
The hidden relationship between fuel efficiency and standard vehicle reimbursements
Even though gas mileage only directly impacts fuel reimbursements and fuel cards, it is important for an organization to take employee vehicle choice into account even when using a different reimbursement approach. The vehicle choice, as it turns out, can indirectly impact company costs and employee behavior.
Take a standard car allowance as an example. An employee who drives a gas guzzling SUV or pickup truck might choose to limit trips in order to save money. This could affect productivity if the decrease of in-person contacts reduces sales or the quality of client relationships. (Decreased in-person meetings due to pandemic restrictions is, of course, a different issue to be considered separately.)
Alternately, an employee receiving a mileage reimbursement might be tempted to buffer their reported mileage with extra miles to offset higher-than-average fuel expenses. Or they might drive unnecessary miles, knowing that the more they drive, the less expensive each mile becomes (this is because of fixed vehicle costs, the Achilles heel of mileage rates).
Standard reimbursement amounts or rates can also create perceptions of inequality when it comes to fuel efficiency. Different employees already incur different levels of vehicle expense based on where they live and how much they drive. Gas prices in California average around $1 more than the national average. Insurance premiums in Michigan run 90% higher than the national average.
Now add to regional disparities the different levels of expense created by different vehicle choices. You can certainly argue that standard rates incentivize more fuel efficient vehicles. But employees may not take that into account if they find that their car allowance or mileage rate is not keeping up with their actual business-related vehicle costs. Given that 90% of mobile employees in a recent survey rated a company car allowance or reimbursement amount "very important" or "somewhat important" when considering employment opportunities, pressure exists to subsidize vehicle choices for employees.
Standardizing the vehicle vs. standardizing the reimbursement rate
One way to deal with varying fuel efficiencies among employee vehicles is to standardize the vehicle used to determine the reimbursement rate in the first place. (But still allow employees to drive their vehicle of choice.)
The great weakness of standard car allowances is taxation. Because 30-40% of a car allowance goes to federal and state taxes, it is common for car allowances to under-reimburse employees. In order to qualify as a non-taxable reimbursement, a payment to offset vehicle costs needs to either directly reimburse actual costs or derive from an IRS-approved calculation method that estimates the vehicle costs.
The most popular non-taxable method, the IRS business mileage rate, ultimately incentivizes employees to drive more than necessary, and can leave low-mileage employees dissatisfied and under-reimbursed.
Standardizing the vehicle used to derive reimbursement rates solves these problems while continuing to keep the company free from subsidizing employee vehicle choices. A company will typically choose the most suitable vehicle for the job, such as a mid-size sedan for a sales rep, and then derive rates based on the zip code where each employee's actual vehicle is garaged (since gas prices and other costs are geographically sensitive).
This approach eliminates the unfair subsidies for gas guzzlers associated with gas cards and fuel reimbursements. It eliminates the tax waste associated with standard car allowances. And it resolves the discrepancies between employees working in different regions associated with standard mileage rates. When a fixed and variable rate approach is added in as well, you also resolve the discrepancies between low-mileage and high-mileage drivers.
Learn more about standardizing the vehicle and localizing the rates in our Guide to 2020 Car Reimbursements. If you are interested in understanding the concept of a fixed and variable rate allowance or reimbursement (aka "FAVR"), read our guide to this approach by selecting the button below.