The IRS Mileage Rate Does Not Guarantee CA Labor Code 2802(a) Compliance

Written by mBurse Team Member Mar 26, 2018 11:39:20 AM

California Labor Code 2802(a) affects any company, big or small, with California-based employees. Not everyone even knows about this labor law, but the potential costs of labor code violations make it crucial to get informed and stay informed.

Originally this labor code was instituted to protect the income of pizza delivery drivers. Pizza delivery driver’s costs were eclipsing their pay reducing it below the minimum wage. Labor Code 2802 obligates employers to reimburse employees for “all necessary expenditures or losses incurred by the employee.” Section (a) of this code specifically addresses vehicle reimbursements to ensure company costs are not passed on to employees.

The landmark 2802(a) case that brought vehicle reimbursements to the forefront was GATTUSO v. HARTE-HANKS SHOPPERS, INC. Decided by the California Supreme Court in 2007, this case made it clear that the law protects not only pizza delivery drivers, but also professional sales reps, merchandisers, light service repair reps, and, by extension, basically any mobile employee driving a personal vehicle for business use. From 2007 onward, businesses with California-based employees have had to figure out how best to comply with 2802(a).

How much should your car allowance be

The most common solution: the IRS, or government, mileage rate 

The best-known solution for California Labor Code 2802(a) has been to reimburse employees using the IRS mileage rate. Organizations generally assume that this rate will cover all employees for all actual expenses. In reality, however, the IRS mileage rate, also known as the standard rate, Safe Harbor, or government mileage rate, still leaves some employees exposed. This annually adjusted rate was never designed to govern employee reimbursements. Instead, it represents last years estimated average cost of owning and operating motor vehicles across the entire country. Using an average of such widely varying vehicles works fine for calculating tax deductions, which is what the government rate was designed to do. It’s an individual taxpayer’s tool, not a corporate reimbursement tool.

This imprecision leads to significant disparities between employees receiving the IRS mileage rate. The IRS rate tends to over-reimburse high mileage drivers and under-reimburse low mileage drivers. These low mileage drivers thus remain exposed to costs for which the company should be responsible.

The inequities caused by the government mileage rate

Let’s look at two employees that live next door to each other, drive the same vehicle, and are both reimbursed using the IRS mileage rate:
Employee A drives 5,500 annual business miles and is reimbursed $2,997.50

Employee B drives 30,000 annual business miles and is reimbursed $16,350.00 

Both employees pay the same amount for their driver’s license, vehicle taxes, and similar car insurance. The high mileage driver, Employee B, will spend a little more for maintenance and tires and spend a lot more for gas. But Employee B is not going to spend $13,352.50 more in gas, maintenance, and tires than Employee A. This is a huge disparity, and it happens all the time. The government mileage rate is simply not the right tool for equitable reimbursement.

As a result of the under-reimbursement Employee A has grounds to argue that the IRS mileage rate does not fairly reimburse and therefore has violated that employee’s rights under CA Labor Code 2802(a). All Employee A has to do is pull their actual costs and compare them to the rate they received to establish a claim. For large organizations with quite a few lower mileage drivers, it doesn’t take much for a class action lawsuit to be established.

Given the reimbursement inequities caused by the government mileage rate, some organizations opt to offer additional compensation to cover low-mileage business travelers’ actual costs. This approach, though, can be difficult and burdensome because of the challenge of ensuring that each employee’s costs are being covered.

21st century mileage capture

An equitable solution: Fixed-and-Variable-Rate reimbursement (FAVR)
The best alternative to reimbursing employees properly in the state of CA is to use a Fixed-and-Variable-Rate reimbursement, or FAVR, program. A FAVR program reimburses employees exactly in the same manner that they incur costs—fixed costs like taxes and insurance, and variable costs like tires and gas. Using the expected costs of a particular zip code and a suitable vehicle for the job, FAVR can ensure that employees receive accurate reimbursements. 

Employee A and Employee B would receive similar amounts for their fixed costs, since they are the same, but different amounts for their variable costs, since Employee B drives more. Employee B would still receive more than Employee A, but the difference would be reasonable and fair, unlike under the government mileage rate.

The FAVR reimbursement is an IRS procedure for businesses to accurately reimburse employees. FAVR is designed for companies, not individual tax payers. It is an accountable plan or expense offset that allows reimbursements to be delivered non-taxed as long as certain rules and guidelines are followed.

In states like California that have expense indemnification clauses, FAVR enables companies to prove that reimbursements are accurate. Employees are not going to be under-reimbursed because the reimbursements track with each employee’s costs, and the company is not going to over-reimburse employees because of that level of accuracy.

Why not reimburse employees exactly the way they incur costs to own and operate their vehicles? Instead of using an individual IRS tax deduction tool, adopt a tool designed for exactly what the company is doing—reimbursing employees with a range of expenses.

For more information about how a FAVR program works, download our FAVR data sheet.

Car allowance vs. FAVR Reimbursement

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