How Rising Gas Prices Affect Car Allowances and Reimbursements

Written by mBurse Team Member   |   Mar 12, 2022 7:20:00 AM

Gas prices are spiking, adding even further to inflation. Understanding how this will affect employees who operate a vehicle for your company is important.

Rising gas prices (again) in 2022

Gas prices had already risen significantly between 2020 and 2021. Now, in March of 2022 gas prices have hit a record high in the United States. As of March 12, the average price of $4.33 per gallon had eclipsed the previous record of $4.10 in 2008. In California, the average price per gallon is $5.73.

How did we get here, and what does this mean for your business?

The primary driver of high gas prices relates to the pandemic. In 2020 demand for gas plummeted, and oil producers responded by sharply decreasing production. Then in 2021 demand increased as more and more people returned to pre-pandemic travel patterns, pushing up prices.

Oil production had not yet caught up with demand when Russia invaded Ukraine, throwing oil markets into confusion. With the United States placing a ban on purchases of Russian oil, it is possible that other nations will follow suit, further reducing supply and increasing prices at the pump.

Gas prices and car allowances/reimbursements

Sharp fluctuations in gas prices have a huge impact on drivers who receive a car allowance or mileage reimbursement. They can also put organizations in violation of state labor laws that require full reimbursement of business expenses (like California's Section 2802). If prices stay relatively flat, then that allowance or mileage rate may be fine, assuming it was set to the optimal amount in the first place. But both steady increases and sharp increases are a different matter.

We all tend to adjust to whatever the "recent normal" has been. Average gas prices have remained relatively low throughout the past several years. Demand for pickup trucks and SUVs has been sky-high this past year, so many Americans are driving vehicles that consume a lot of gas.

People who drive a vehicle for work are getting hit by the recent spike in fuel costs as a significant expense increase. If their car allowance or mileage reimbursement does not increase in order to help out with this new level of expense, it will affect how often and how much they drive.

computer mouse selecting three steps

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 directly absorb the increase in gas prices. But it is also possible employees will use the fuel card as a perk, increasing their personal use of company-purchased gas. Consequently, 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 you can expect rapid increases in gas prices to affect mobile employees' driving habits. An employee receiving a mileage rate might 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 2022 IRS mileage rate, if you use that), was not calculated with a large price spike in mind.

An employee receiving a car allowance may opt to do more phone calls and Zoom calls in place of face-to-face meetings. The car allowance will be the same either way, but the driver's expenses will be lower. If this fits current company goals, then great. But if the company wants its reps to be out on the road, this is 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 adjustments in response to rising or falling gas prices.

In the case of an extreme spike like we are experiencing now, you should perform a review immediately and calculate a new rate and/or set new expectations of how much travel employees should conduct.

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 calculating one allowance or rate for the whole company could be a problem.

Right now the average gas price may be $4.33/gal across the country, but if you have an employee in Oklahoma, they are paying $3.87/gal, while an employee in California is paying around $6/gal. If you pay the same mileage rate or allowance to these two employees, is that fair?

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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