If your employees travel for business in personal vehicles, and receive a car allowance, that allowance may violate California’s labor code. CA Labor Code, Section 2802(a), requires full coverage of all business vehicle costs. But standard car allowances are often not up to the job.
Most organizations pay mobile employees a flat car allowance because it’s conventional and easy. Car allowance programs originated as disguised compensation as an alternative to offering a company car. Now that so workers drive personal vehicles for their jobs, employees require robust reimbursement of vehicle expenses.
Inflation has increased many costs associated with vehicle ownership and use over time. Consequently, car allowances require timely adjustments to keep up with those vehicle costs. When was the last time your organization check to ensure that its car allowance was sufficient?
No federal law requires employers to pay for employees’ business vehicle expenses – as long as these expenses do not reduce pay below minimum wage. State laws are a different matter. Several states, including California, Massachusetts, and Illinois, have developed expense indemnification codes designed to protect employees’ income. Employers that do not carefully abide by labor codes can end up incurring fines or lawsuits.
If you have employees in California, precede with extreme caution, when paying a flat, taxable car allowance. The cost of operating a vehicle in California is among the highest in the country. Our most recent survey found the average car allowance nationwide to be a bit under $600/month. A $600/month car allowance in California 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 25 mpg.
California gas prices average $4.80/gallon.
Are you sure their costs are covered?
The employee used in this example will incur $288 in monthly fuel costs alone! How far will the remaining $72 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:
You comply with the law by paying out more money each month, but each of the following approaches carries its own costly problems.
A third option solves the labor code problem while controlling costs: Reimburse employees based on up-to-date accurate expense data.
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: