A growing number of states have labor codes that indemnify employees from work-related expenses. If your organization pays a car allowance or mileage reimbursement, here’s how to ensure your compliance with state labor laws like California's Labor Code 2802.
Labor Laws and Reimbursements
Car allowances and mileage reimbursements are straightforward. A company provides employees with either a stipend or mileage rate to offset personal vehicle costs. But that compensation can get complicated if employees operate in states with expense indemnification laws.
These states dictate how, when, and how much employees are reimbursed for the business use of personal equipment such as vehicles. These indemnification codes cover more than just vehicle reimbursements. They also can 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 on expenses 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 their costs to operate their vehicles impacted 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
Four U.S. jurisdictions explicitly indemnify employees from company expenses: California, Illinois, Massachusetts, and the city of Seattle, WA. Other jurisdictions have laws that implicitly require a reimbursement or allowance for vehicle use: Washington, D.C., Iowa, Montana, New Hampshire, North Dakota, and South Dakota.
If you currently have employees working in one of those places, you need to ensure that your organization fully covers all work-related vehicle expenses. You should also have a written policy governing these reimbursements. This policy should include, rates, payment schedules, and reimbursement processes.
Other State Labor Laws
Be aware of additional employee-friendly states, such as Michigan and New York. In both state lawsuits have occurred as a result of under-reimbursing employees. Furthermore, both New York and Pennsylvania state laws require employers to follow through with contractually promised reimbursements in a timely manner.
Finally, most states have minimum wage laws. Thirty-four states exceed the federal minimum wage of $7.25 per hour. If business vehicle costs reduce your employees' wages below the minimum, you are breaking the law. A federal judge found in favor of a pizza delivery driver for this reason in March 2024.
How Indemnification Labor Laws Impact Business
No one wants to pay penalties or fines as a result of labor code violations. No one wants to face a class-action lawsuit, either. These worst-case scenarios should impact your choices regarding employees who use a vehicle to carry out their job.
The larger the organization, the more expensive labor code violations can get. On average, the penalties can amount to $4000 per employee per year. The employer can also expect to pay for the employee’s legal fees going back up to four 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
During extended periods of high vehicle costs, it is important to make appropriate recalculations of reimbursements. While over time gas prices tend to even out, auto insurance premiums and maintenance costs tend to increase.
Employees who rely heavily on vehicle travel for their work will experience a shortfall when costs rise. They may reduce travel, which may reduce productivity. They may bump up the amount of reported miles to compensate for the increased expense. If the situation continues, they may file a complaint in a state with strict wage payment laws.
These realities make it important to regularly assess and modify the car allowance or reimbursement rate. Otherwise, in times of rapidly increasing inflation and fuel costs, employees will take measures to protect their income on their own – measures that will not likely benefit the company.
Ensuring Labor Code Compliance
Given the expense of labor code violations, and the current level of inflation, it’s important to take steps to avoid future complications. For an immediate fix, follow these two quick and easy steps:
- Update your vehicle reimbursement policy as soon as possible.
- Change your mileage rate to the IRS mileage rate.
However, these quick fixes are not long-term solutions or best practices and will lead to other problems later. We only recommend these as short-term solutions to “buy you time” to implement a more permanent fix.
IRS Mileage Rate and Labor Laws
The IRS mileage rate has typically been recognized as the standard for compliance with labor codes. However, current circumstances render it a problem for California drivers facing high costs. The cost per mile of a low-mileage driver can easily eclipse the IRS mileage rate. This is because fixed car costs, such as depreciation and insurance, are spread over fewer miles.
The IRS mileage rate was calculated based on last year's average costs and this year's expected costs. California experiences significantly higher costs than average, especially in the area of fuel.
FAVR Allowances and Labor Laws
There are better options for a long-term solution. We recommend the Fixed and Variable Rate Reimbursement (FAVR), which is more accurate than the IRS rate. FAVR is an IRS accountable plan and the best way to remain compliant with ALL expense indemnification labor codes. This is because FAVR uses localized cost data to determine rates.
Contact mBurse to learn more about how switching to a FAVR reimbursement plan could help your organization comply with labor codes—and save money in the process.
