If your employees travel for business in their personal vehicles, and they receive a flat car allowance, you are probably violating California’s labor code. CA Labor Code, Section 2802(a), requires full coverage of all business vehicle costs, as do some other state labor codes. But standard car allowances are not equipped to handle current labor code demands.
Car allowances and labor codes (like CA 2802)
Most organizations pay mobile employees a flat car allowance because it’s easy, and because they’ve “always done it this way.” Car allowance programs originated as disguised compensation before the evolution of mobile employees. But times have changed, and as employees increasingly drive personal vehicles for work, employees increasingly require robust reimbursement of expenses.
The COVID-19 pandemic has created both challenges and opportunities for organizations with mobile employees. While many employers suspended or reduced their company car allowance due to inactivity in 2020, the resumption of business travel and high gas prices have brought opportunities to revisit car allowance amounts and structures.
No federal law requires employers to reimburse or pay employees’ expenses for driving their personal vehicles for business – as long as these expenses do not drop their pay below minimum wage. But state laws are a different matter. Several states, including Massachusetts, California, and Illinois, have developed expense indemnification codes designed to protect employees’ income. Employers that do not carefully abide by labor codes can end up paying dearly in fines or even class action lawsuits.
Why $600/month likely runs afoul of California Labor Code 2802(a)
If you have employees in California, precede with extreme caution, especially if paying a flat, taxable car allowance. The cost of operating a vehicle in California is among the highest in the country. Our 2020 survey found that the average car allowance last year was a bit under $600/month. If you are paying a $600 car allowance to California employees, it could pose serious problems.
Let’s realistically compare a mobile employee’s take-home pay with work expenses:
Employee A receives $600/month allowance, but nets $360 after taxes.
Drives 75 business miles a day or 1,500 business miles per month
Personal vehicle gets 23 mpg.
California gas prices average $4.40/gallon.
Are you sure their costs are covered?
The employee used in this example will incur $287 in monthly fuel costs alone! How far will the remaining $73 go to cover the employee’s other vehicle-related expenses? Auto insurance alone will eat up most, if not all, and depreciation is often the biggest expense. Did you factor that in?
Business vehicle expenses an allowance must cover under CA law:
- License fees
- Vehicle taxes
2 ways to comply with CA Labor Code 2802(a)... and blow the budget
You can potentially solve the problem by paying out more money each month, but each of the following approaches carries its own costly problems.
Add compensation to meet labor code requirements.You will ensure you are covering each employee's costs. The challenge is making sure you are covering their costs without overspending. If you can measure how much compensation it will take to match the costs, you have solved the problem. However, different employees experience different levels of expense, which means you may overpay some and underpay others.
Reimburse mileage using the IRS mileage rate.The problem is, the IRS mileage rate is designed for tax deductions, not for reimbursements. This rate will always over-reimburse high mileage drivers and under-reimburse low mileage drivers, which will again leave you exposed. For example, the 2021 IRS mileage rate would reimburse Employee A’s 1,500-miles, a mid-mileage number, with $840. Additionally, if you are going to pay the IRS mileage rate, you must use an accountable mileage log. Self-reported or overstated mileage can break budgets.
A third, and better, option for labor code compliance: FAVR allowance
A third option solves the labor code problem while controlling costs: Reimburse employees based on up-to-date accurate expense data.
Adopting the fixed and variable rate car allowance (FAVR)
A FAVR reimbursement is tailored to solve the labor code quandary and prevent class action suits without overspending. Each employee will receive their own comprehensive reimbursement based on the costs of owning and operating a standard vehicle the company selects as being the right tool for the task to get their job done. These costs are determined by the employee’s zip code. Combined with an accountable mileage log, this approach offers long term cost control while fully reimbursing each and every employee.
In the end you have options, and the price for inaction could be expensive. It is best to take a proactive approach to reimbursing your mobile employees to mitigate the risk of labor code violations. Of course, overpaying is also an option, but not a particularly attractive one.
It’s time to make your mileage reimbursement and car allowance policy a priority. For more information about how FAVR works, download our FAVR data sheet. Or calculate how you can leverage your current plan's tax waste into savings while complying with labor codes: