A growing number of states and local jurisdictions require employers to reimburse employees for necessary work-related expenses. For companies with mobile employees, vehicle reimbursement compliance is especially important. If your organization pays a car allowance, mileage reimbursement, or other vehicle stipend, here’s how to reduce compliance risk under labor laws such as California Labor Code 2802 and similar employee reimbursement requirements.
Labor Laws and Reimbursements
Car allowances and mileage reimbursements are straightforward. A company provides employees with either a stipend or a mileage rate to offset personal vehicle costs. But that compensation can get complicated if employees operate in states with expense indemnification laws.
These laws can affect how, when, and how much employees must be reimbursed for the business use of personal equipment, including vehicles. Requirements vary by jurisdiction, but the core issue is the same: employers should not pass necessary business expenses onto employees in a way that reduces their wages or creates reimbursement gaps.
These indemnification codes cover more than just vehicle reimbursements. They can also cover cell phones, internet, data plans, and more. This guide will focus on vehicle reimbursements. They can also cover cell phones, internet, data plans, and more. This guide will focus on vehicle reimbursements.
Expense Indemnification Labor Codes
Expense indemnification codes are wage-and-payment laws that prevent employers from passing expenses on to employees. To indemnify an employee from business expenses means to protect that employee's wages from work-related costs.
California Labor Code 2802(a) best exemplifies expense indemnification. This labor law was established to protect pizza delivery drivers. These employees were being paid low wages and had to operate their personal vehicles. When the costs of operating their vehicles affected their income, lawsuits ensued. Since then, several large organizations in California beyond pizza chains have faced lawsuits and hefty fines.
States with Expense Indemnification Codes
Several jurisdictions have explicit employee expense reimbursement requirements, including California, Illinois, Massachusetts, and the city of Seattle, Washington. Other jurisdictions may create reimbursement obligations through wage payment rules, minimum wage laws, employment agreements, or court decisions.
If your organization has employees working in these locations, review whether your current car allowance or mileage reimbursement program fully covers necessary business vehicle expenses. Employers should also maintain a written reimbursement policy that explains eligible expenses, documentation requirements, reimbursement rates, payment timing, and approval processes.
Other State Labor Laws
Be aware of additional employee-friendly states, such as Michigan and New York. In both states, lawsuits have resulted from under-reimbursing employees. Furthermore, both New York and Pennsylvania state laws require employers to provide contractually promised reimbursements in a timely manner.
Many states, territories, districts, and local jurisdictions have minimum wage rates above the federal minimum wage of $7.25 per hour. If unreimbursed business vehicle expenses reduce an employee’s effective wages below the applicable minimum wage, employers may face wage-and-hour risk. In March 2024, the Sixth Circuit addressed this issue in pizza-delivery driver cases, holding that vehicle expenses must be considered when determining whether employees were paid at least the minimum wage under the FLSA.
How Indemnification Labor Laws Impact Business
No one wants to incur penalties or fines for labor code violations. No one wants to face a class-action lawsuit, either. These worst-case scenarios should inform your choices regarding employees who use a vehicle to perform their jobs.
The larger the organization, the more expensive labor code violations can be. On average, the penalties can amount to $4,000 per employee per year. The employer can also expect to pay the employee’s legal fees for up to 4 years.
It may prove costly in the short run to ensure full reimbursement of all employee drivers. However, the long-term cost of penalties, fines, and lawsuits will have a bigger impact. Your organization should therefore learn and comply with labor laws in the states where your employees work.
Inflation and Indemnification Laws
Vehicle costs change over time, and reimbursement programs should be reviewed regularly to make sure employees are not absorbing necessary business expenses. Fuel prices may rise and fall, but insurance premiums, maintenance costs, repairs, registration fees, and depreciation can create lasting pressure on reimbursement.
When reimbursements do not keep pace with actual vehicle costs, employees may reduce business travel, report more miles to offset expenses, or raise wage-and-hour concerns in states with strict reimbursement rules. Regular policy reviews help employers identify reimbursement gaps before they become compliance issues.
Ensuring Labor Code Compliance
Given the cost of labor code violations, employers should regularly review their vehicle reimbursement policies, especially when employees work in states with expense reimbursement or wage-and-hour risk.
As a short-term step, employers can benchmark their current reimbursement program against updated vehicle cost data to see whether employees are being paid enough to cover necessary business vehicle expenses. This can help determine whether your current car allowance, mileage reimbursement rate, or vehicle policy needs adjustment.
Employers may also compare their current reimbursement rate against the IRS mileage rate. For 2026, the IRS business mileage rate is 72.5 cents per mile. However, the IRS rate should be treated as a benchmark, not a complete compliance strategy.
The IRS mileage rate may not fully account for every employee’s actual costs, especially when drivers operate in high-cost regions or drive fewer business miles. A long-term reimbursement strategy should consider mileage, geography, fixed vehicle costs, variable costs, documentation, and state-specific requirements.
IRS Mileage Rate and Labor Laws
The IRS mileage rate is commonly used as a reimbursement benchmark, but it is not always a perfect fit for labor law compliance. The rate is based on broad cost assumptions and does not automatically reflect each employee’s actual vehicle expenses, mileage pattern, or location.
This can create problems for low-mileage drivers because fixed costs, such as insurance, depreciation, registration, and taxes, are spread across fewer business miles. It can also create challenges in high-cost states or cities where fuel, insurance, and maintenance costs exceed national averages.
For that reason, employers should not assume that using the IRS mileage rate alone eliminates the risk of reimbursement. It should be reviewed alongside actual employee driving patterns, local vehicle costs, and applicable state or local reimbursement laws.
FAVR Allowances and Labor Laws
For many organizations, a Fixed and Variable Rate reimbursement program, or FAVR, can be a stronger long-term solution than a flat allowance or a single cents-per-mile rate. FAVR separates fixed vehicle ownership costs from variable operating costs and can account for local cost differences.
This makes FAVR useful for employers with drivers in multiple states, high-cost regions, or different mileage bands. While no reimbursement method eliminates the need to review applicable laws, a well-structured FAVR program can help employers improve reimbursement accuracy, strengthen documentation, and reduce the risk of under-reimbursing employees.
Not sure whether your current car allowance or mileage reimbursement program is creating compliance risk? mBurse can help you evaluate your policy, compare reimbursement options, and determine whether an FAVR reimbursement plan would better support your mobile employees.
FAQs About Employee Reimbursement Labor Laws
What are employee reimbursement labor laws?
Employee reimbursement labor laws require employers to reimburse employees for necessary work-related expenses. For mobile employees, this may include business vehicle expenses tied to using a personal vehicle for work.
Which states have employee expense reimbursement laws?
California, Illinois, Massachusetts, and Seattle, Washington, have explicit employee expense reimbursement requirements. Other jurisdictions may also create reimbursement obligations through wage laws, employment agreements, court decisions, or minimum wage rules.
Is the IRS mileage rate enough for compliance?
Not always. The IRS mileage rate is commonly used as a benchmark, but it may not reflect every employee’s actual vehicle costs, especially for low-mileage drivers or employees in high-cost regions.
Can a flat car allowance create compliance risk?
Yes. A flat car allowance can create compliance risk if it does not fully cover necessary business vehicle expenses. A one-size-fits-all allowance may overpay some employees and underpay others.
How can FAVR help with reimbursement compliance?
FAVR can help employers create a more accurate reimbursement strategy by separating fixed vehicle ownership costs from variable driving costs. Because it can account for mileage, location, and vehicle expenses, FAVR may help reduce the risk of under-reimbursement.