Is It Time to Switch from a Company Car to FAVR Reimbursement?

Written by mBurse Team Member   |   May 17, 2021 7:00:00 AM

For many industries 2020 was a year of loss, forcing them to re-evaluate priorities and figure out how to survive. COVID-19 is now forcing many organizations to decide whether to continue offering a company vehicle to employees or switch to a FAVR vehicle reimbursement model.

COVID-19 and company vehicle fleets

COVID-19 has forced many organizations to reevaluate necessary versus unnecessary expenses. Many organizations and industries faced lower sales and reduced operational success, and their leadership pushed to identify savings opportunities in the midst of the pandemic.

Expenses that were once an afterthought or off limits were suddenly on the table for discussion. For many industries, this has meant a renewed willingness to question company-issued vehicles for employees. Undoubtedly one of the most desirable perks available, the company car has long been seen as an essential tool for hiring and retaining top talent.

In the past, operations and sales divisions have viewed the company vehicle as a tradition woven into the inner fabric of an organization. Removing such an attractive perk has often been avoided because it would be such a disruptive move. But now a move or partial move from a fleet to a personal vehicle reimbursement is being viewed as a fiscal responsibility or even an operational necessity.

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 economic pressures triggered by decreases in sales and demands for services, unique circumstances brought on by the pandemic exposed or exacerbated existing challenges to managing a company fleet.

1. Idle fleets and fixed vehicle costs

With so many people working from home, many company fleets were underutilized. Yet the fixed costs associated with operating a company fleet remained relatively unchanged. Such fixed costs include leasing payments, depreciation of company-owned vehicles, auto insurance, and property taxes, which in total form the largest portion of fleet expenses.

Months of continued expenses without requisite cashflow from sales put some organizations into a financial hole. With remote work and Zoom sales calls likely to play an increased role post-pandemic, some organizations may find it unsustainable to pay for an underutilized fleet and instead opt to reimburse employees for personal vehicles using a FAVR plan.

2. Costs of personal use of company vehicles

By far the biggest challenge to cost-effective fleet management is personal use. This was a reality before the pandemic, remained a reality for essential businesses in 2020, and will remain a reality. 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.

For organizations that allowed employees working from home to continue using the company vehicle, it is possible that most of the company expense put toward the vehicle was actually subsidizing personal use. 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.

In addition, operating a company-wide personal use chargeback policy is complicated and time consuming, even though it is required by the IRS in order to avoid taxing company vehicles and employees' benefit from them.

All in all, the pandemic exposed businesses with inferior personal use policies and is now forcing them to either manage the program more effectively or pivot away from company-issued vehicles to reimbursement of a personal vehicle.

Compare your vehicle program to a FAVR Plan

Post-COVID future of company cars vs 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. We are now at a crossroads where companies will have to choose between more effectively managing their fleet programs or reducing or even abandoning their fleets.

Company car programs must be managed to control costs. 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.

While many struggling organizations will rebound in the near future as the pandemic ends, if they do not take a hard look at their company vehicle program, they will have missed a golden opportunity to embrace more sustainable business practices. With gas prices on the rise again, maintaining company fleets will only get more expensive.

While switching away from such an attractive perk entails undeniable risks, if it becomes necessary 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.

How to Transition from Company Car to Reimbursement


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