Illinois in 2018 joined eight other states that legally require employers to reimburse employees for the use of a personal vehicle at work. Here is the best way to reimburse these employees and comply with the Illinois Wage Payment and Collection Act.
What reimbursements are required for personal vehicle expenses in Illinois?
If you have employees working in the state of Illinois, they are covered under a labor law that states, "An employer shall reimburse an employee for all necessary expenditures or losses incurred by the employee within the employee's scope of employment and directly related to services performed for the employer." (Source: Illinois Wage Payment and Collection Act)
These necessary expenditures or losses include expenses related to the use of a personal vehicle on behalf of an employer. This is made clear because the law states that the reimbursement should cover "all reasonable expenditures or losses required of the employee in the discharge of employment duties and that inure to the primary benefit of the employer."
Reasonable expenses include not only obvious ones like fuel, oil changes, and tires but also auto insurance, depreciation, and taxes, license, and registration. Any organization operating within Illinois needs to ensure that they are complying with this employee indemnification law in order to avoid costly penalties.
What is the best way to reimburse your Illinois employees for the use of a personal vehicle?
The best way to reimburse your Illinois employees for the use of a personal vehicle will meet the following criteria:
Quantifiable and defensible methodology
Automated expense reporting with timely payments
Cost-effective for the organization
Of the available methods of reimbursement – mileage reimbursement, vehicle allowance, individual expensing, fixed and variable rate reimbursement – only one meets all these criteria.
How to pay a quantifiable vehicle reimbursement to Illinois employees
A defensible reimbursement under the Illinois WPCA should have a methodology for deriving payments that are quantifiable and based on vehicle expense data. The most common forms of payments to employees for the business use of a vehicle do not meet this criteria.
A fixed and variable rate reimbursement, or FAVR, is notable because its rates are derived from localized vehicle expense data. The IRS-approved methodology of a FAVR reimbursement allows for a precise application of data to each employee in the organization, no matter how many miles they drive annually or how big the organization is.
Why automation and timely payment are important for Illinois vehicle reimbursements
Automated expense reporting is important in order to keep employees focused on their jobs, rather than on completing administrative tasks. Any expensing system that relies on manual reporting of individualized expenses will be time-consuming and frustrating for drivers and managers.
Many mileage reimbursement programs involve some amount of manual reporting of trips and mileage. Not only can this lead to overestimates at the expense of the organization, but it can lead to frustration among everyone involved in the mileage reporting and approval process.
While a standard vehicle allowance requires almost no administrative work, it is the method most likely to lead to underpayments. This is because the lack of accountable reporting makes the allowance amount fully taxable, reducing the take-home amount by as much as 40%.
Best practice is to integrate a GPS-based mileage app into your organization's expensing system and automatically calculate mileage and reimbursements using mobile devices, whether you use a standard mileage rate or a FAVR reimbursement rate.
The most cost-effective way to reimburse your Illinois employees for a personal vehicle
Of the various options available, a FAVR plan is the most cost-effective. It is accurate, eliminating the risk of violations of the Illinois Wage Payment and Collection Act. When paired with an appropriate mileage tracking app and integrated into the reimbursement system, it requires little administrative time from employees and managers. As an IRS-approved accounting method, FAVR is tax-free as well.
Setting up a FAVR program is complicated because of the vehicle data needed to derive the rates. But the savings that come from its advantages more than pay for vendor fees and can bring a significant return on investment. A properly administrated FAVR vehicle program brings peace of mind because it will prevent violations of the Illinois labor code.
What are the legal consequences for violating the Illinois Wage Payment and Collection Act?
The employer must also pay an additional fee to the Illinois Department of Labor ranging from $250 to $1,000, depending on the size of the underpayment amount. It is also important to note that any officers of the corporation who knowingly allowed the underpayment to occur may also be found personally liable for the money owed to the employee.
How to protect your organization from Illinois labor violations today
To protect your organization from labor code violations in Illinois, choose a vehicle reimbursement method that is quantifiable, data-driven, automated, and cost-effective. We recommend fixed and variable rate reimbursement because it is the only plan that combines all of these qualities.