How the IRS Mileage Rate Violates CA Labor Code 2802(a)

Written by mBurse Team Member   |   Jan 3, 2022 7:00:00 AM
3 min read

It is often standard practice to reimburse vehicle expenses using the IRS business mileage rate. In the past, the IRS rate was often sufficient to comply even with California's strict labor laws. However, as fuel costs soar, California employees receiving the IRS rate are threatening labor code lawsuits against their employers.

California reimbursement laws vs. the federal mileage rate

mBurse recently had a client switch from paying the IRS mileage rate to our fixed and variable rate reimbursement plan (FAVR) because of the changes occurring in California. A number of employees were finding that their mileage reimbursement could not keep up with their vehicle costs and were considering taking legal action. 

As California vehicle costs continue to rise (especially with planned yearly increases in the gas tax), more companies will switch away from the standard federal mileage rate (62.5 cents per mile in 2022). Employee reimbursement laws in California will play a crucial role.

How much should your car allowance be

Doesn't the IRS mileage rate comply with CA Labor Code 2802(a)?

Whether reimbursing with the IRS standard rate complies with the California labor code depends on a number of factors. The most important factor is the miles driven by an employee. Typically, low-mileage employees are most at risk to find the IRS rate falling short of their vehicle expenses. But increasingly, high-mileage drivers are also reporting that their reimbursements are too low.

We'll explain below how both low-mileage and high-mileage drivers can be under-reimbursed with the government mileage rate. But first, let's look at what California law actually requires.

CA Labor Code Section 2802(a) and vehicle reimbursements

Here's what California's labor law states about business reimbursements from employers:

“An employer shall indemnify his or her employee for all necessary expenditures or losses incurred by the employee in direct consequence of the discharge of his or her duties, or of his or her obedience to the directions of the employer, even though unlawful, unless the employee, at the time of obeying the directions, believed them to be unlawful.”

In other words, California state law fully indemnifies, or protects, employees from incurring any work expenses on behalf of their employer. If an employee's job requires a vehicle, then the employer must fully cover the costs both of owning a vehicle and operating that vehicle when carrying out job responsibilities.

To understand why California employees increasingly are threatening to sue their employers for labor code violations, we need to look at exactly what vehicle costs should be reimbursed and what those costs are likely to be.

Labor Code self audit

What vehicle costs are covered by CA Labor Code 2802?

If the job requires the use of a personal vehicle, then the basic costs of owning a suitable vehicle are subject to reimbursement. This would include car insurance, vehicle depreciation, taxes, and fees such as registration and license. And then there are the costs of driving the vehicle – fuel, oil, tires, maintenance. 

The 2022 IRS mileage rate is $.625/mile. That means, in order for a company reimbursing with the IRS mileage rate to fully comply with the California labor code, each employee would need to incur vehicle costs equal to or less than their number of business-related miles multiplied by 58.5 cents.

Say that an employee drives 1000 business miles per month and therefore receives a $625 reimbursement. That vehicle, especially if relatively new, could easily be depreciating at a rate of $300 to $400 per month. Then there's the insurance. The average car insurance premium in California is $1846 per year, or about $150 per month. You probably want employees to carry higher than average coverage to protect the company in the event of an accident, so the insurance could easily cost $200 per month.

So with just depreciation and insurance, your employee is already coming close to maxing out the $625 reimbursement. And we haven't even begun to look at fuel costs, which are actually what has triggered the recent uptick in California employees threatening lawsuits.

CA gas tax and labor code violations

California increased its gas tax effective July 1, 2019 by 5.6 cents per gallon. And by law it has increased every year in line with inflation. With California gas prices already far exceeding the national average, this has placed renewed pressure on employers to increase their vehicle reimbursements.

The problem is, the IRS mileage rate does not increase in response to state increases in vehicle costs such as gas prices. The IRS sets its standard business rate based on national averages from the previous year. And that's the flaw inherent to using the government mileage rate as a reimbursement rate, especially in California – if employees experience vehicle costs at higher than the national average (and CA employees always do), then the IRS rate just won't keep up with their costs.

Low-mileage and high-mileage drivers vs. the IRS mileage rate

In the example we used, the employee driving 1,000 miles per month would be a mid-mileage driver. The challenges of reimbursing fully with the IRS rate only worsen as the number of miles driven decreases, making low-mileage drivers the ones most likely to be under-reimbursed.

We learned about one driver in California who averaged 425 miles per month – a reimbursement of $246.50 under the 2019 federal mileage rate of $.58/mi – yet was paying almost $200 per month in auto insurance. Imagine what happens when you factor in depreciation, gas, maintenance, tires, and everything else. This employee made a solid case that their employer was violating CA Labor Code Section 2802(a). Because the IRS rate does not allow you to quantify a precise reimbursement for expenses, that employer wouldn't have a leg to stand on in court.

While high-mileage drivers are able to spread their fixed costs like insurance and depreciation over more miles, they feel the effects of the gas tax increase. We know of one company in which 20 or so employees presented spreadsheets and receipts proving that, in the wake of the July 1 tax hike, their reimbursements were falling short. They were prepared to take legal action had the company not done the right thing and changed reimbursement practices.

FAVR reimbursement and CA labor code compliance

It is more imperative now than ever that employers with California drivers embrace the fixed and variable rate reimbursement as an alternative to the IRS mileage rate. FAVR reimbursement separates out predictable fixed costs such as depreciation and insurance for each employee and pays those costs on an individual basis based on a reasonable, standard vehicle. This helps the low-mileage drivers fully cover those expenses without having to drive extra miles to compensate.

IRS Rate v. FAVR - Calculate Savings

FAVR reimbursement plans also pay a mileage rate that can changes month-to-month based on increases and decreases in gas prices. This helps resolve the problems facing the high-mileage drivers in the wake of the increased gas tax. The variable mileage rate is also individualized and calculated based on a standard vehicle and the employee's garage zip code.

Choosing a FAVR vehicle reimbursement gives an organization a quantifiable and transparent reimbursement they can stand behind when employees raise questions. The IRS mileage rate cannot do this. More importantly, a FAVR plan will protect the company from labor code violations and class action lawsuits.

Contact mBurse to learn more about our FAVR reimbursement plans.

FAVR car driving on highway

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