As July ends and August begins, it is clear that the United States faces a long and complicated road through the COVID-19 pandemic. Vehicle reimbursement policies should be revised to reflect the variety of ongoing challenges for domestic business travel.
The need for flexible vehicle reimbursements
Organizations whose employees typically operate vehicles as part of their job face an unprecedented variety of circumstances that require a new approach to business travel reimbursements. Some states have re-opened, some states have instituted new restrictions; some localities are experiencing major outbreaks, some have low levels of COVID-19; some employees are eager to travel, others cannot travel for safety reasons.
How does an organization protect its employees' safety, manage legal risks, and still conduct business under these circumstances? Best practices suggest employers should limit employees to essential travel, make approved travel voluntary (i.e. optional), follow strict safety policies such as daily health screenings and no travel to areas experiencing outbreaks, and provide personal protective equipment.
All of this means that U.S. companies, especially those operating in multiple regions, could have employees operating under a variety of conditions over time, some entirely from home, some on the road under strict limitations, and some on the road with less strict limitations. To appropriately reimburse employees for their use or non-use of personal vehicles for work, employers need to develop more flexible policies.
(To learn more about the needs of non-traveling employees, read "Reimbursement of Employees Working from Home.")
Employee reimbursement challenges from COVID-19
If your organization currently offers some kind of travel reimbursement for personal vehicle use, is it flexible enough to handle the current variety of circumstances?
If some employees are working entirely from home while others are using their vehicle for business trips, should they both still receive a monthly car allowance? Is a mileage reimbursement a better option, since it only reimburses those who actually travel?
To help answer these questions, it is important to consider what a business vehicle policy actually reimburses for. An organization that requires certain employees to maintain a personal vehicle for business use needs to reimburse employees not only for the operational costs (e.g. gas, maintenance, etc.) but also the business portion of vehicle ownership (e.g. insurance, depreciation, taxes and fees, etc.)
In many states, such as California and Illinois, it is a legal requirement to fully reimburse the business portion of both sets of costs. Even in places where it is not a legal requirement, it is a matter of fairness to employees and enhances the competitiveness of benefits.
Neither a standard car allowance nor a mileage rate is flexible enough to handle the current circumstances. If an employee working from home is expected to keep their vehicle maintained, licensed, and fully insured so that they can resume normal responsibilities when it is safe, the employer should subsidize the non-operational costs. A mileage reimbursement cannot do this because all payments are tied to actual travel.
Similarly, if employees in one part of the country are only minimally using their vehicle to travel while employees in another area are traveling more frequently, neither a standard car allowance nor a mileage reimbursement can equitably reimburse both sets of employees. The car allowance is over-reimbursing those who drive very little, and the mileage rate is under-reimbursing those low-mileage drivers because it does not address the non-operational costs.
How to update a business reimbursement policy for vehicles
If you are revising your organization's business reimbursement policies or developing a new policy, here are some guidelines to remember.
1. Know taxation rules for car allowances and reimbursements
Be aware that a standard car allowance is taxable income whereas a mileage reimbursement is typically non-taxable, as long as it is less than the IRS business mileage rate ($.575/mile for 2020) and the employer keeps an accurate record of employee mileage and purpose of each trip. Fuel reimbursements can be non-taxable if the company tracks mileage and can prove that all payments went to business use.
Because taxes can take up to 40% of the payment, that needs to be factored in when developing a vehicle policy. Given the limited ability of mileage and fuel reimbursements to address the needs of low-mileage drivers, it is important to explore other non-taxable options (more on this below).
2. Know the state labor code requirements for vehicle reimbursements
Employers face an increased level of risk right now from employee travel. Employees may file workman's compensation suits if they get COVID-19 from traveling; or they may file a disability discrimination complaint if they are required to travel but have a condition that makes them high-risk from infection.
This makes it all the more important to ensure that your vehicle travel policies are responsive to state labor laws that require full reimbursement of business use of a personal vehicle, such as California's Labor Code Section 2802(a). Putting in place a policy flexible enough to fully cover each employee's business vehicle costs while not overpaying any employee is more crucial than ever.
3. Use vehicle cost data to derive customized reimbursements
This is the most challenging but most crucial step in developing a fair and flexible reimbursement policy. Because different parts of the country experience different levels of costs in gas prices, insurance, and more, it is important to take into account these regional differences when crafting a business reimbursement policy for employees working in different locations.
It is also important to base cost calculations on a standard vehicle appropriate to the job, not employees' actual vehicles. mBurse can supply geographically-based cost data for different vehicles as part of our professional services. Using the IRS mileage rate or a set car allowance, by contrast, does not base reimbursements on accurate cost data and therefore cannot yield equitable vehicle reimbursements.
Consider an innovative employee reimbursement option: fixed and variable rate
The vehicle reimbursement approach best suited for companies with employees facing a variety of work circumstances is called FAVR, or fixed and variable rate reimbursement.
This IRS-approved method sound complicated but in practice leads to cost-effective, equitable, and flexible employee vehicle reimbursements. FAVR uses localized cost data to derive customized reimbursements that blend the car allowance and mileage reimbursement approaches.
The employee who drives a little still gets reimbursed for the business portion of their vehicle ownership costs and not just their operational costs. The employee who drives a lot gets a higher reimbursement for operational costs on top of their ownership costs. All payments are non-taxable to both the employees and the company.
Whether employees return to normal business operations or circumstances force them to continue or revert back to limited travel, they are still appropriately reimbursed, and the company is protected from labor code violations.
Learn more about this innovative approach to employee business reimbursements by selecting the button below, or schedule an exploratory call to answer your questions.