The Gas Tax and CA Labor Code 2802 - What to Do about It

Written by mBurse Team Member Aug 13, 2019 2:41:20 PM

As we reported in part 1 of this blog, the state of California raised its gas tax effective July 1, leaving its motorists paying $1 more per gallon than the national average. This creates conflicts for business owners under CA Labor Code 2802(a) if they pay a car allowance or mileage reimbursement. Let's explore how to resolve the conflict.

Why does the CA gas tax conflict with the CA labor code?

Under California's strict labor law, CA Labor Code Section 2802(a), employers must fully reimburse all employees for expenses incurred in order to carry out job responsibilities. For organizations with employees who drive personal vehicles as part of their job, this means reimbursing ALL business-related vehicle expenses. In fact, it means reimbursing the costs of vehicle ownership, since a vehicle is a job requirement for those jobs.

The costs of owning and operating a vehicle are quite high in California, and with the recent boost in the gas tax, they just got even higher. This means that all organizations with employees who operate vehicles in California need to review their car allowance, mileage reimbursement, and/or fuel reimbursement to make sure these payments are truly keeping up with employee vehicle expenses.

Labor Codes

Why not just pay the IRS mileage rate to comply with the CA Labor Code?

As we established in part one of this series, it is not sufficient to pay the IRS mileage rate. Remember, this mileage rate represents last year's average cost of vehicle ownership and operation across the entire United States. Because California costs far exceed that average, it is likely that the IRS mileage rate will fall short as a vehicle reimbursement method when held to the high standards of CA Labor Code 2802. 

Let's look at an example of an employee who could claim that the IRS mileage rate does not sufficiently reimburse their vehicle expenses and file a lawsuit under the California labor code.

CA Labor Code, meet Dodge Durango

Let's say you have a Los Angeles-based employee who drives a Dodge Durango. Perhaps not the most economical choice, but this employee likes to offer clients a roomy, comfortable ride when taking them out to lunch.

Guess how much that Durango costs per mile to operate with the new gas tax in place? Not $.58/mile (the 2019 IRS rate). Not $.60/mile. Not $.65/mile.

Nope, it's a whopping $.68/mile! 

This full-size SUV depreciates quickly, has high maintenance costs, and guzzles gas, so it's going to prove costly to anyone who drives it. But in an expensive state like California, even a sedan or crossover SUV could push an employee above the IRS mileage rate threshold. This is especially true if they are a low-mileage driver, since large fixed costs like depreciation and auto insurance are spread out over fewer miles.

What about a $700/month car allowance?

Okay, let's say you have a driver with a Dodge Durango driving 1000 miles per month at a cost of $.68/mile. That's $680 in monthly vehicle expenses. Your car allowance exceeds that. But you forgot about the taxes.

That car allowance could be getting taxed by 40% when you include federal income taxes, FICA/Medicare, and California's high state income taxes. So now that $700 is only $420. 

This is a California labor code lawsuit waiting to happen. You can add a fuel reimbursement to help out with the new gas tax increase, but that's going to get costly and complicated. Let's explore other options that can keep an organization compliant with California's strict labor laws.

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Two vehicle reimbursements that comply with CA Labor Code 2802

With the two fair reimbursement methods we're going to discuss below, the key starting point is choosing a standard vehicle on which to base the reimbursement rates. A Dodge Durango may not be the most appropriate vehicle for a particular job, so if an employer specifies a particularly appropriate vehicle and bases rates off of it, they can legally demonstrate that they are fully reimbursing all reasonable costs.

The IRS mileage rate is not based on a particular vehicle, so there's no way to prove that you are reimbursing all reasonable costs if an employee with an expensive vehicle claims that you aren't.

Good option: SMART Mileage Rate

Using vehicle expense data for the employee's zip code and the company selected vehicle, you develop an optimized cents-per-mile rate for each employee in that zip code. Employees in other parts of the country receive a different mileage rate in recognition of incurring costs at a different rate. For guidance on how to obtain this data and use it properly, contact mBurse.

A California employee will receive a higher mileage rate than average, but this can help prevent labor code violations. This approach is more accurate than using the IRS mileage rate, but it's not the most accurate approach. Let's look now at the most accurate approach of all.

Great Option: FAVR Reimbursement

The fixed and variable rate reimbursement, also known as FAVR, also bases rates on a standard vehicle and on expense data for that vehicle in the employee's garage zip code. But FAVR achieves an even higher degree of accuracy by dividing costs into two categories, fixed and variable, and reimbursing those two categories differently.

Fixed costs include depreciation, auto insurance, and fees like registration, license, and personal property taxes. These costs can be precisely determined for a standard vehicle in a particular zip code, generating a fixed monthly payment to the employee, sort of like a car allowance.

Variable costs include gas, oil, maintenance, and tires. These costs can be accurately estimated and turned into a cents-per-mile rate that adjusts up and down based on gas prices. 

The employee receives a combination of the fixed monthly amount and the mileage reimbursement, delivering an accurate, tax-free benefit that will meet the high standards of CA Labor Code 2802(a).

To learn more about how FAVR works and what it would look like to implement a FAVR vehicle program, read our Ultimate Guide to Understanding FAVR.

Comply with the labor code, avoid costly outcomes

In 2019 it's only getting more costly to own and operate a vehicle in California. Take the time to evaluate your organization's vehicle reimbursement program to make sure it meets the costly demands of working in California. Prevent labor code violations now with a fair vehicle reimbursement.

FAVR car driving on highway

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