Policies governing employee vehicle use and reimbursement affect many areas of an organization. The key is to fit these policies to your core objectives while boosting employee satisfaction and maximizing scalability.

HR Leadership Guide to Business Vehicle Policy

Whether your organization pays a car allowance, reimburses mileage, provides a FAVR plan, or issues company vehicles, this part of your employee benefits package will either help your organization achieve its objectives or get in the way. An optimized policy puts core objectives first while allowing the organization to grow and retain top employees.

Suboptimal car allowance and mileage reimbursement policies

Many organizations leave business vehicle policies unreviewed for years, not realizing that they are undermining organizational efficiency or decreasing workforce morale. Suboptimal car allowances and inequitable mileage reimbursements can have these exact effects.

For example, because standard car allowances are taxable income, the take-home amount for employees could be significantly less than what their jobs require in vehicle use. This shortfall could dampen productivity by causing them to drive less or increase workforce attrition over time.

Taking the time to strategically review your company policies governing business vehicle use and reimbursement will pay dividends. Prioritizing core objectives, employee satisfaction, and scalability can clarify the optimal policy for your organization.

Business vehicle policies that undermine organizational objectives and company culture

Your organization's mission, core objectives, and strategic plan should drive all decisions, even small ones like how much car allowance to pay and whether to adopt a non-taxable plan. It does not make sense to pick a business vehicle policy based on familiarity or convenience when that policy could end up undercutting higher priorities.

Company vehicle policies and client relations

If your organization depends upon building strong and lasting relationships with clients, then face-to-face meetings are a must. You'll want your account managers and reps out and about, fully supported, whether that involves driving a company vehicle or a personal vehicle. Aspects of your business vehicle policy can make it harder for your people to travel, such as an insufficient car allowance or a time-consuming mileage reporting process.

Vehicle reimbursements and company culture

Similarly, if you have prioritized a company culture of collaboration between employees who feel valued and dignified, traditional business vehicle policies can undermine that culture. Mileage reimbursements are known for over-reimbursing high-mileage workers and under-reimbursement low-mileage workers. Plus, some employees live and work in more expensive places than others. The inequitable nature of standardized mileage rates and car allowances can disrupt your company culture.

Employee satisfaction and vehicle benefits policy

An insufficient or inequitable vehicle reimbursement policy will quickly erode employee satisfaction. It is not unusual for a policy that has remained unreviewed for many years to be associated with employee attrition.

Company vehicles, car allowances, and employee satisfaction

Issuing a company vehicle can produce a high level of employee satisfaction because it is such a valuable perk. But that may not be a sustainable option for many organizations. Simply raising a car allowance or mileage rate can also become very expensive without actually addressing the key issues causing the decline in employee satisfaction.

A $600/month taxable car allowance is obviously more valuable than a $500/month taxable car allowance. But you are still giving away around 40% on average in taxes, reducing the actual effect of the raise. Increasing a mileage rate will not do anything to change the fact that inequities will persist based on how much employees drive or where they live.

Data-driven car allowances and reimbursements that retain employees

To boost employee retention, base the business vehicle policy on localized vehicle expense data and use a standardized vehicle to derive the rate. If you substantiate business use with an IRS-compliant mileage log, you can eliminate the taxation as well. Developing a data-driven policy is the most cost-effective way to provide a robust and equitable benefit.

It is also important to supply a mileage log that is convenient and easy to use. When looking at today's automated, GPS-enabled mileage apps, make sure choose one with strong customer support and privacy protections.

Scalability and allowances, reimbursements, and fleet programs

A car allowance, mileage reimbursement, or company vehicle program that worked when you had 20 employees might not work so well when you have 200. A small company whose employees work in similar locations may incur similar expenses, allowing the organization to pay a standard allowance or mileage rate to all of them.

But as the organization expands into new areas and has a wider variety of employee expense needs, a standardized rate might not work. In the case of company vehicles, an expansion of employees may mean a vast expansion of expenses or a situation in which newer employees receive lesser benefits as the program is phased out over time.

An optimized policy will not only help retain valuable employees but also allow growth to occur in a cost-effective way. Flexibility and customization are important traits in a scalable vehicle policy.

FAVR vehicle policy - scalable and cost-effective

Fixed and variable rate reimbursement, also known as FAVR, is the most flexible and customizable way to offset employee vehicle expenses. It is an IRS-recommended way to eliminate taxes from a car allowance and  inequities from standard mileage rates. If a company decides to transition away from offering a company car, this reimbursement method is the most cost-effective way to support employees in driving the vehicle of their choice.

HR leaders should take time to determine whether a data-driven, tax-free FAVR plan will help support your core objectives better than a car allowance, mileage rate, or fleet.