What is your car allowance amount based on? If it’s not based on data, you could be in trouble. You may be overpaying or underpaying. You may face increased attrition rates or productivity losses or even lawsuits.
The car allowance is an important part of a mobile employee’s benefits package. It protects the employee’s income from the high costs of operating a personal vehicle for work. So it follows that a good employer will carefully consider the appropriate allowance amount, right? Unfortunately, this is not the reality in most companies.
In our 2018 car allowance survey, fewer than one-third of respondents used data to set their organization’s allowance amount. Most said it was a random amount or didn’t know where the number came from or had just based it off of a competitor’s allowance—and how many of those competitors were the same ones who answered, “random amount” or “I don’t know”?
Why data is crucial to car allowances
Basing a car allowance off of data serves the interests of both the employer and the employee. Here’s why: the costs of operating a vehicle for work involve a variety of constantly changing factors. This means that an amount that worked yesterday may not work tomorrow. An amount that fits the organization’s budget might be straining the employee’s budget. An amount that works for an employee in one state might not work for an employee in another state.
All of these disparities can lead to the problems mentioned earlier. Let’s look at each problem and how data can help solve it.
- Car allowance - overpayment and underpayment
Our survey found that 77% of respondents had not changed their car allowance in the last ten years. During that period, inflation has risen significantly. A $500/month allowance in 2008 was worth only $426/month in 2018. During that same period, the average price of gas has fluctuated between $1.75/gallon and $4/gallon. In other words, some months, the company might have been overpaying, but other months, it wasn’t paying enough.
But it’s not just chronological cost differences; it’s also geographical cost differences. Gas in California often runs a whole dollar higher per gallon than gas in South Carolina. Insurance rates, personal property taxes, and maintenance/repair costs also run higher in some locations than others. Using a standard, unchanging car allowance to address dynamic and diverse expenses creates inequalities between employees, leading to the next two problems.
- Vehicle allowance attrition and productivity losses
If expenses outstrip the car allowance, employees will take steps to protect their financial picture. They may opt for fewer face-to-face meetings and schedule travel in ways that benefit the employee more than the company or the client. Or employees may leave for a job with a more robust compensation plan.
Decreased productivity proves costly over time, as does hiring new employees. Plus, if employees realize the inequalities of their situation, morale will dip, exacerbating the situation. But that pales in comparison to the next problem on our list.
- Car allowance lawsuits
If your car allowance isn’t based on data and underpays some employees, legal consequences could ensue. Some states require employers to indemnify employees from all work-related expenses. Failure to fully reimburse employees for actual expenses can lead to labor code violations, penalties, and lawsuits. If your car allowance isn’t based on data, how can you be sure you are fully covering employees’ expenses?
But state labor codes aren’t the only threat. If the car allowance amount has become insufficient, an employee may reduce car insurance coverage. If that happens and the employee is involved in a work-related accident, the company could end up paying.
The importance of data and car allowances
To ensure that your allowance fully covers employees’ expenses, you need data: regional gas prices, regional car insurance rates, employees’ territory sizes, and the amount of driving employees should be doing to stay productive. This information isn’t hard to obtain, but it may prove costly to boost car allowances. To some degree, the expense will be offset by prevention of the problems outlined above. But there’s another bit of data to consider: tax waste.
That $500/month allowance gets hit hard by taxes. Employees are probably taking home somewhere between only $375 and $300 after taxes, and the organization is paying payroll taxes on the $500 as well. Switching to a non-taxable reimbursement plan could mean paying the same or less per month while leveraging the elimination of taxes to increase employees’ take-home pay.
Switching to a non-taxable reimbursement plan could save everyone money while fully covering employees’ expenses. Contact mBurse today to find out how to implement a non-taxable plan. Or if you aren’t ready to take that step, ask us for a report that benchmarks your current car allowance amount to industry standards.