Employees working in California are covered under one of the country's strictest labor codes. Here's how to properly reimburse your employees for the use of a personal vehicle for work.
If you have employees working in California who use a personal vehicle for their job, then it is important to properly reimburse them. CA Labor Code Section 2802(a) requires employers to reimburse all "reasonable costs" associated with carrying out job responsibilities.
If operating a vehicle is required for carrying out those responsibilities, then the employer must reimburse the business portion of vehicle expenses: fuel, oil, tires, maintenance, insurance, depreciation, taxes, and license/ registration.
There are a number of ways to reimburse these expenses:
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 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.
By comparing this reimbursement method with the other approaches, it is easy to see why it is better for most employers and employees.
Paying a mileage rate is the most common practice for reimbursement of a personal vehicle in fulfillment of CA Labor Code 2802(a). Most often, the employer pays the IRS standard business rate, which is 67 cents per mile for 2024.
The problem is, that rate was calculated based on national averages, not California expenses or drivers whose annual mileage falls outside the average range around 14,000 miles. This means that some drivers will be under-reimbursed within a large organization, especially given California's higher-than-average vehicle expenses.
Paying a fixed and variable rate reimbursement avoids that risk of exposure to labor code violations. This is because FAVR plans use rates calculated based on localized vehicle costs and can be adjusted based on a driver's annual mileage.
While most organizations prefer the simplicity of paying a mileage rate, some may opt to have employees expense everything – fuel purchases, oil changes, auto insurance premiums, tolls, etc. Submitting expense receipts 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 like insurance premiums, taxes, and depreciation that are not easily addressed by a mileage rate. But these payments are based on localized cost data applied to a standard vehicle selected by the company for generating rates. This means that employees do not have to waste time submitting receipts.
Paying a vehicle allowance is even simpler than paying a mileage rate, but one of the riskiest approaches to complying with CA Labor Code 2802(a). Because a vehicle allowance is taxable, the after-tax amount determines whether the employee is fully reimbursed for vehicle expenses. Taxes can eat up 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 going to reimburse vehicle expenses. This makes it more affordable even after paying a third-party vendor to run the program, and it makes it more defensible against labor code claims.
Unless your organization is composed of employees who fit average expenses used to calculate the IRS mileage rate – not likely in California – the only way to ensure proper reimbursement of a personal vehicle is FAVR.
By partnering with the right vendor, you can eliminate headaches and have a policy that is tax-free, quantifiable, defensible, and cost-effective. Because a FAVR plan reimburses every employee based on localized costs, you are guaranteed to pay all employees exactly what fits their needs.
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.