After three years of vehicle price increases and inflation in vehicle-related costs, now is a good time to reevaluate your company fleet. Your organization may benefit from switching some or all employees to a FAVR vehicle reimbursement model.
Time to switch from a company car to a vehicle reimbursement?
Though there has been some moderation, prices of new and used vehicles remain historically high. This is a strong reason to consider pivoting away from the business model of a company-provided vehicle.
Of all ways to provide for employees who need a vehicle to complete their jobs, a company car, company truck, or company van is the most expensive. The organization assumes all the costs and risks associated with vehicles, and these costs and risks are high.
Other more affordable options can include a car allowance, a mileage reimbursement, or our recommended option, a FAVR vehicle plan. In all these cases, employees drive a personal vehicle, but the employer offsets the costs associated with the vehicle.
Why is a company fleet so costly today?
What is behind the increase in vehicle costs? One factor is the computer chips in today's cars and trucks. In 2020 to 2021 there was a semiconductor shortage that delayed the manufacturing of new vehicles, leading to scarcity that could not meet demand.
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 has posed a huge challenge. The average price of a new vehicle is $48,558, according to Kelley Blue Book. While this is down from the peak in 2022, when prices were over $49,000, it is still much higher than just four years ago, when prices averaged $41,152.
In addition, insurance costs have risen by 38% during this same timeframe, again in part due to the computer chips used to make the many sensors in today's vehicles. These chips make a vehicle much more expensive to repair in the event of an accident, leading to higher insurance claims. It also doesn't help that vehicular fatalities have increased over the past few years, leading, again, to higher insurance claims.
Timing a transition from a company car to a car allowance or vehicle reimbursement
Because used vehicles continue to command higher prices than four years ago, now is still an opportune time for an organization to consider shifting away from the company car model to a vehicle reimbursement model. Doing the math may demonstrate that an organization can recoup a higher percentage of costs by selling its fleet now than just a few years ago. This can help your organization ease the way to a new, more sustainable model.
Unless your organization operates in an industry in which staying competitive means offering a company vehicle, now is a great time to consider the most cost-effective and scalable alternative. The most fair 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 challenges of chargeback policies on company cars
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. However, if left unmanaged, the costs are significant and catastrophic. You can’t manage what you can’t see. This means 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. 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.
Read our "Everything You Need to Know" guide to making the transition to learn more about making a switch while retaining employees.
