Record vehicle prices and inflation in vehicle costs raise the question of whether to continue offering a company vehicle to employees. Some organizations might considering switching some or all employees to a FAVR vehicle reimbursement model.
Time to switch from a company car to a vehicle reimbursement?
In the wake of the pandemic, the prices of new and used vehicles remain historically high. The global semiconductor shortage, which had already driven up vehicle prices, has now resulted in such a supply shortage that U.S. auto sales were down 21% during the second quarter of this year compared with the same period of 2021.
Because today's cars and trucks rely so much on computer chips, the chip shortage continues to wreak havoc on the auto industry. For businesses that supply company vehicles to employees, this situation poses a huge challenge. The average price of a new vehicle once hit yet another all-time high in June of 2022 at $48,083. And now it's getting harder to find new cars when it comes time to turn over an aging fleet.
On the positive side, used cars are commanding higher prices than ever (up 42% from the end of 2019). In fact, because of the combination of high prices for new vehicles due to scarcity and the resulting high demand for used vehicles, now is a great time for an organization to consider shifting away from the company car model to a vehicle reimbursement model.
The most cost-effective and competitive personal vehicle reimbursement model is called fixed and variable rate reimbursement. This approach is also known as FAVR reimbursement or a FAVR car allowance.
Reasons to switch from company vehicles to FAVR vehicle reimbursement
Apart from high vehicle prices, the current economic conditions have exposed or exacerbated existing challenges to managing a company fleet.
1. Costs of personal use of company vehicles
By far the biggest challenge to cost-effective fleet management is personal use. To what degree does an organization subsidize its employees' personal use of company vehicles? Often this question is difficult to answer because management does not have sufficient visibility into the employees' use of the vehicle.
It is not that employees are dishonest; but let's face it, convenience is king, and it takes time and attention to accurately track and report personal use of a vehicle as distinct from business use. But with gas prices running high, the cost of personal use is also running high.
2. The complications of chargeback policies
In addition, operating a company-wide personal use chargeback policy is complicated and time consuming. In order to make sure the company is not paying for gas and wear-and-tear that contributes nothing to its goals, it is necessary to operate a strict policy of charging back employees for personal use.
In fact, maintaining a personal use chargeback policy is required by the IRS in order to avoid taxing company vehicles and employees' benefit from them. So either way there's a cost – the administrative cost of operating an effective chargeback policy, or the cost of subsidizing extra gas and mileage while running risks of an unpleasant IRS audit.
How to switch from a company car to FAVR
The company car has a long tradition in American business. When managed properly, a fleet program is a huge benefit for employees and a helpful tool for employers to attract and retain an effective workforce. But if left unmanaged the costs are significant and catastrophic. You can’t manage what you can’t see. This means either adopting a personal use policy that provides greater visibility or adopting a reimbursement program for personal vehicles.
Now could be a golden opportunity to make the switch, due to the unique circumstances around the prices (and scarcity) of new vehicles and the demand for used vehicles. While switching away from such an attractive perk entails undeniable risks, the best alternative is FAVR reimbursement. This is because a FAVR plan constantly adjusts to changing localized vehicle costs and never over-reimburses or under-reimburses employees. It is a fully transparent program, so employees know they are not getting shorted.
To learn more about how to make a switch while retaining employees, read our "Everything You Need to Know" guide to making the transition.