Why Your Car Allowance Violates CA Labor Code 2802(a)

Written by mBurse Team Member | May 29, 2023 12:00:00 PM

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.

Car allowances and labor codes (like CA 2802)

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.

Why your car allowance violates California Labor Code 2802(a)

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:

  • Maintenance
  • Tires
  • Insurance
  • Depreciation
  • License fees
  • Vehicle taxes

2 bad ways to comply with CA Labor Code 2802

You comply with the law by paying out more money each month, but each of the following approaches carries its own costly problems.

  1. 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.

  2. 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. For example, the 2023 IRS mileage rate of 65.5 cents-per-mile would reimburse Employee A’s 1,500-miles with $982.50. 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 good way to comply with the labor code: 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: