How Rising Gas Prices Affect Car Allowances and Reimbursements

Written by mBurse Team Member Mar 22, 2021 7:00:00 AM

You may have noticed that gas prices are rising again after months of relatively low costs at the pump. Understanding how this will affect employees who operate a vehicle for your company is important.

Rising gas prices in 2021

There has been a noticeable increase in costs at the pump in February and March of 2021. In fact, in many places prices have risen by 50 cents-per-gallon or more since the new year began. With the national average at $2.88/gal as of March 20, you have to go back to May of 2019 to the last time gas prices were this high.

During the past year, low demand due to Covid-related travel restrictions kept prices low. But now with so many states lifting restrictions and vaccinations occurring, demand is increasing and will likely continue to increase as the summer nears. So we can expect gas prices to remain higher over the coming months.

Gas prices and car allowances/reimbursements

In theory, fluctuations in gas prices should not have a huge impact on drivers who receive a car allowance or mileage reimbursement. Even though their allowance or reimbursement might not change with the changes in fuel costs, they should know that it all evens out in the end, right?

That's not how it works in reality. We all tend to adjust to whatever the "recent normal" has been. Average gas prices may have neared $4 a gallon in 2012, but in the years since, we've adjusted our driving behavior and vehicle choices back to lower prices. Demand for pickup trucks and SUVs has been sky-high this past year, and you may remember it being much lower a decade ago when gas prices were significantly higher.

All that's to say, people who drive a vehicle for work are likely going to perceive the recent spike in fuel costs as a significant expense increase in comparison with the recent normal of cheaper gas. If their car allowance or mileage reimbursement does not increase in order to help out with this new level of expense, it will affect their thinking about how often and how much they drive.

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Fuel card/reimbursement vs. mileage rate or car allowance

If your organization gives employees a fuel card or reimburses gas purchase receipts, then the company will be directly absorbing the increase in gas prices. In that case, it is logical to assume that the recent spike in prices will affect employee's behavior very much. There are many challenges and cost-control problems with administering this type of program, which you can learn more about elsewhere.

[Read 5 Reasons NOT to Give Employees a Fuel Card]

For organizations that pay a mileage rate or car allowance, however, it is not unusual to find that rapid increases in gas prices affect mobile employees' driving choices in a number of ways. It may be as simple as driving a more fuel efficient vehicle, if they own more than one vehicle, which may be fine as long as the company does not have rules about what type of vehicle employees may drive on behalf of the company.

But it could also mean that employees take other measures that end up costing the company in the long run. An employee receiving a mileage rate might actually drive more or at least report more miles driven, since this is the only way to boost their monthly reimbursement. They will likely feel justified since the company mileage rate (or the IRS mileage rate, if you use that), was not derived with a large price spike in mind.

On the flip side, an employee receiving a car allowance may opt to do more phone calls and Zoom calls in place of face-to-face meetings, even as more and more people are starting to feel comfortable going back to in-person business contacts. Their car allowance will be the same either way, but their expenses will be lower. If this fits current company goals, then great. But if the company is trying to encourage its reps to get back out on the road again, this could be a problem.

Ways to address gas prices with employee vehicle reimbursement

The easiest way to help ensure that rising gas prices have no effect on employee productivity is to make it a company-wide practice to review the reimbursement or allowance amount every six months and make modest adjustments in response to rising or falling gas prices.

This is better than doing nothing and will bring far fewer headaches than adding a gas card or fuel reimbursement to your vehicle program. But this approach has its limitations, especially if you have employees operating in different regions throughout the country.

Right now the average gas price may be $2.88/gal across the country, but if you have an employee in Oklahoma, they are only paying $2.50/gal, while an employee in California could be paying more than $4/gal. If you pay the same mileage rate or allowance to these two employees, is that fair?

In fact, given California's strict reimbursement laws, this recent spike in gas prices could cause your organization to violate CA Labor Code, Section 2802(a), which requires full reimbursement for all employee vehicle expenses incurred through work – that is, if there is no increase in the allowance or reimbursement rate.

Tying reimbursement rates to employee zip code

The secret to an effective vehicle reimbursement program is to tie employee car reimbursements to their home zip code. Yes, this complicates things, since it means paying a somewhat different rate to each employee, but this shift in approach will pay for itself in the long run.

To learn more about the most cost-effective way to make this shift, explore the FAVR car reimbursement program below – or schedule a call to find out what it would look like to institute this type of program at your organization.

FAVR car driving on highway

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