The Best Way to Reimburse California Employees for a Personal Vehicle

California has one of the country's strictest labor codes. Here's how to properly reimburse California employees for the use of a personal vehicle.

California's rules for employee vehicle reimbursements

California employers are required by law to reimburse employees for the business use of their personal vehicle. CA Labor Code Section 2802(a) requires employers to reimburse all "reasonable costs" associated with carrying out job responsibilities.

The business mileage reimbursement rules in California do not set a specific rate. But they do make clear that an employer must reimburse the business portion of all vehicle expenses. These expenses can include fuel, oil, tires, maintenance, insurance, depreciation, taxes, and license/ registration. Gas reimbursement in California will not comply with state law by itself.

Rules for California business reimbursements do list several ways to cover these costs.

Reimbursement methods for CA vehicles

Employers may choose from a range of methods to reimburse business expenses incurred by California employees:

Reimburse mileage
Reimburse receipts (expense method)
Pay a vehicle allowance (use after-tax amount)
Pay higher wages (use after-tax amount)

Each of these methods has critical problems. The best method is a lesser known approach called fixed and variable rate reimbursement, or FAVR.

The best employee mileage reimbursement for California

The best way to reimburse California employees for business use of a personal vehicle is a FAVR car allowance. Why? A FAVR plan is non-taxable and guarantees accurate, full reimbursement of all reasonable expenses.

A comparison of FAVR with other methods will show why it is better for most employers and employees.

California mileage reimbursements

Paying a mileage rate is the most common practice for reimbursement of a personal vehicle. The standard mileage reimbursement in California is the same as the federal mileage rate. Most often, the employer pays the IRS standard business rate, which is 67 cents per mile for 2024.

Some difficulties come with using the federal rate for California state mileage reimbursements. The IRS calculates its business mileage rate based on national averages, not California expenses. The rate best matches drivers whose annual mileage falls around the average range of 14,000 miles.

Paying the federal mileage reimbursement to California employees will result in some under-reimbursements, especially given California's higher-than-average vehicle expenses. The discrepancy will be highest for drivers who drive less than the national average.

Paying a fixed and variable rate reimbursement avoids that risk of exposure to labor code violations. This is because FAVR plans use rates calculated from localized vehicle costs. These rates adjust regularly based on a driver's annual mileage.

Expense reimbursement for CA vehicles

While most organizations prefer the simplicity of paying a mileage rate, some may opt to have employees expense everything. The list could include fuel purchases, oil changes, auto insurance premiums, tolls, and more. Submitting expense receipts, however, is time-consuming for the employee as well as for management.

A FAVR plan, like a mileage reimbursement, uses a mileage rate as part of its system. But it also includes payments to reimburse fixed expenses that a mileage rate may not suitable address. These fixed expenses can include insurance premiums, taxes, and depreciation.

By quantifying both fixed and variable costs, FAVR programs deliver highly accurate payments. FAVR rates also utilize localized cost data applied to a standard vehicle selected by the company. This means that employees do not have to waste time submitting receipts.

Vehicle allowances and California reimbursement laws

Paying a vehicle allowance is the simplest, riskiest way to comply with CA Labor Code 2802(a). A car allowance is taxable, so the after-tax amount determines whether the allowance complies with the law. Taxes can amount to 40% of the payment. The same is true of paying a lump sum or higher wages to cover vehicle expenses.

Unlike a standard vehicle allowance, a FAVR allowance is non-taxable and quantifies the amount paying for vehicle expenses. Removing taxes keeps FAVR affordable even after paying a third-party vendor to run the program. Most importantly, quantifying the payments makes FAVR more defensible against labor code claims.

Calculating mileage for California reimbursements

For both the IRS standard mileage rate and FAVR rates you need to track mileage. For proper mileage pay in California, you need to use an IRS-compliant mileage log. This can take many forms as long as it contains the following information:

Date and purpose of the trip
Start location and destination
Number of miles driven

While many organizations use paper logs or digital spreadsheets, these are not the best methods to record business mileage. Look instead for a mobile app that records mileage in real time. The more automated the system, the more your drivers will be happy to use it.

Many mileage tracking apps have a hands-free mode to make mileage capture more convenient. They also allow easy editing before you upload mileage for reimbursement. The best systems enable quick and easy mileage approval, with only unusual trips flagged for investigation by management.

Ensuring CA Labor Code 2802 compliance

The strongest reason to choose a FAVR program is the long-term stability it brings. A stipend or car allowance cannot ensure compliance with California Labor Code, Section 2802(a). The expense reimbursement method is not scalable as a business grows. FAVR, on the other hand, will comply with the law whether you have five employees or five thousand.

The national mileage rate may not work for every employee. A driver based in an expensive area who makes short trips in urban traffic could face a shortfall. The payment relies on total miles rather than on actual costs-per-mile. FAVR, on the other hand, determines costs-per-mile based on localized factors.

Business vehicle reimbursements in California

The only way to ensure proper reimbursement of a personal vehicle is FAVR. The IRS mileage rate may be useful if all employees have costs similar to the national average. However, drivers in California face higher costs than average.

Plus, relying entirely on mileage to determine payments exposes the company to certain risks. Some employees may report extra miles just to boost their take-home pay. By paying fixed costs separately, a FAVR plan reduces this risk.

Partnering with the right vendor can provide a policy that is tax-free, defensible, and cost-effective. Your FAVR administrator will take the headache out of calculating rates and provide convenient software. Remember, a FAVR plan uses localized data to guarantee fair payments for all employees.

Learn more about FAVR here, or speak with a specialist who can describe what a FAVR plan might look like for your organization. Or use the automated plan comparison below.