The HR Leader’s Guide to Employee Vehicle Reimbursements
Stay up to date with best practices in reimbursement
Learn more about car allowances, how much is the right the amount and remain competitive
Offering a fair vehicle reimbursement to employees complies with applicable laws and helps attract and retain valuable workers. An optimized vehicle reimbursement can even reduce risks associated with employee auto accidents.
The Risks and Rewards of a Mobile Workforce
The success of any organization relies on its people. Your workforce provides valuable expertise within and service to customers and clients. Treating these employees well dignifies them and keeps them invested in the organization long-term. In the case of a mobile workforce, that means ensuring that their lives and livelihoods are protected while on the road.
The risks associated with a mobile workforce can also leave the organization exposed. Employers can be held liable for employee-caused accidents. Employers can also face penalties under state labor codes if they do not adequately reimburse employees for business vehicle expenses.
This guide to vehicle reimbursement will equip HR personnel to ensure that all vehicle reimbursement and vehicle travel policies follow best practices to manage risks and treat employees fairly:
- Adopting reimbursement policies that attract and retain good employees
- Complying with state labor codes that govern vehicle reimbursements
- Reducing the risk of insurance liability from employee vehicle accidents
- Instituting a safety policy that reduces accidents and prevents negligent entrustment
- Chapter 1 Adopting vehicle reimbursement policies that attract and retain talent
- Chapter 2 Complying with state labor codes that govern vehicle reimbursement
- Chapter 3 Reducing the risk of insurance liability for employee car accidents
- Chapter 4 Reducing the risk of accidents and negligent entrustment suits
Adopting vehicle reimbursement policies that attract and retain talent
It’s no secret that employee retention relies on sufficient compensation. When insufficient reimbursement for business expenses eats into someone’s hard-earned money, they will look for ways to remedy the situation, including finding a new job. Morale can also dip when employees become aware that their vehicle reimbursement program pays some employees better than others – a problem with standard car allowances and mileage reimbursements.
Inequitable vehicle reimbursement programs and their effects on employees
Paying an equal rate for unequal cost needs.
Because territory sizes vary and costs between locations can also vary, two employees with the same role operating in different locations can experience very different costs. If they receive the same car allowance or mileage rate.
Overpaying and underpaying with a mileage rate
High-mileage drivers often generate reimbursements that exceed their costs, while low-mileage drivers may need more miles to cover their expenses. The more expensive the location, the more dramatic the shortfall can become.
Offering a taxable car allowance instead of reimbursement.
Because taxes can eat up 30 to 40% of the car allowance amount, standard car allowances often need to cover all business-related vehicle costs. This is because car allowances are compensation rather than reimbursement. Reimbursement programs require business substantiation (i.e., via a mileage log) and are more cost-efficient and employee-friendly.
Paying for gas without sufficient boundaries.
Receiving a gas card can be a perk for employees if they can use it to cover personal gas costs. But that’s not the purpose. A conscientious employee who carefully avoids making personal trips on company gas will be frustrated if there is no system to prevent abuse by other workers (e.g., a chargeback policy or limits on when and how much gas people can pump).
The best reimbursement plan for delivering equitable payments to all employees
The most equitable vehicle reimbursement method is fixed and variable rate reimbursement, or FAVR.
To learn more about how this tax-free reimbursement method can deliver accurate, competitive payments, read our HR Guide to FAVR Reimbursement. Choosing an equitable, transparent reimbursement system will protect valued employees and help the organization grow with a purpose.
Complying with state labor codes that govern vehicle reimbursement
Learning the state labor laws that apply to your mobile workforce
The following nine jurisdictions indemnify employees from business expenses:
California
Illinois
Massachusetts
Montana
North Dakota
South Dakota
Additional employee-friendly states like Michigan and New York allow employees to sue for insufficient reimbursement. Furthermore, New York and Pennsylvania state laws require employers to follow through with contractually promised reimbursements promptly.
If you have employees working in any of those states, updating your reimbursement model to comply with those laws is imperative. It is especially imperative if you have any California-based employees.
How to reimburse California employees for vehicle use
California’s Labor Code Section 2802(a) is among the strictest of these reimbursement laws. California is also one of the most expensive states in terms of vehicle costs. Employers must use a robust reimbursement system to comply fully with the law. The most popular way to comply with CA Labor Code 2802(a) is to pay the IRS business mileage rate, or 67 cents per mile, for 2024. While this rate is generally considered compliant, it tends to reimburse inequitably.
As we established above, mileage rates tend to over-reimburse and under-reimburse the drivers whose mileage totals are on the ends of the spectrum.
The IRS mileage rate, derived from average expected costs nationwide, is best applied to drivers whose expense levels are near the average. In an expensive state like California, your reimbursement will not cover your costs if you do not drive a certain number of miles per month.
This is another reason we recommend that organizations explore the FAVR reimbursement method. A FAVR plan guarantees compliance with state reimbursement laws while reimbursing all employees equitably.
Reducing the risk of insurance liability for employee car accidents
Vicarious liability for employee vehicle accidents
Much of the risk related to employee vehicle accidents centers on the legal doctrine of respondeat superior, also known as vicarious liability; in the case of an accident caused by an employee while on the job, the employer can be held responsible. The first way this concept can be applied is to uninsured or underinsured employees who cause an accident while working.
Employee insurance coverage and best practices for reducing employer liability
When an uninsured or underinsured motorist causes an accident while on the job, the victims will seek recourse from the employer’s insurance company.
Under the principle of respondeat superior (“let the master answer”), since the employer sent the employee on the errand, the employer can answer for the employee’s deeds.
For this reason, your organization must establish a minimum insurance coverage required for all employees who drive as part of their jobs and then routinely verify their compliance with the policy. Here are the best practices to follow:
Establish appropriate minimum employee auto insurance coverage.
There needs to be more than the minimum coverage in the state since most states require only enough coverage to cover injuries and property damage from minor accidents. Accidents that lead to hospital stays or fatalities require robust coverage.
We therefore recommend requiring a 250/500/100 policy. That is coverage of up to $250,000 per bodily injury, up to $500,000 in total bodily injuries, and up to $100,000 in property damage.
Verify auto insurance coverage semi-annually.
Require employees to upload a copy of their auto insurance declarations page to the reimbursement/expense system every six months or every time their insurance renews.
If the insurance verification is not current, the employee’s vehicle reimbursement is suspended until the verification is completed.
Update your auto allowance or reimbursement rate to cover insurance.
Ensuring that your vehicle reimbursement policy directly reimburses the amount of each employee’s auto insurance premiums is vital.
This practice will eliminate any temptation to reduce coverage and send the message that your organization is serious about protecting and treating your employees fairly.
Reducing the risk of accidents and negligent entrustment suits
Negligent entrustment of a vehicle to employees
Another source of liability for employee vehicle accidents is negligent entrustment. Under the legal doctrine of respondeat superior, the victim of an accident can hold the driver’s employer responsible by proving that allowing that person to drive for the company was an act of negligence.
For this reason, reducing the risk of employee vehicle accidents and instituting practices that will reveal and respond to risky driving habits is essential. There are three main steps to mitigate this set of risks and protect your employees and your organization.
Best practices to reduce the risk of employee motor vehicle accidents
Institute a Driver Safety Policy as part of your vehicle reimbursement plan
Including a Driver Safety Policy in your more extensive vehicle reimbursement policy should be a priority. This would include clear language about rules and expectations for safe driving, frequency of motor vehicle record checks, consequences for violations, and interventions to improve driver safety.
Maintain routine Motor Vehicle Record checks for employees.
Putting in place regular motor vehicle record (MVR) checks for employees can help your organization determine whether an employee has become a safety risk. Interventions through a driver safety program can help reduce that safety risk and provide valuable evidence against any allegations of negligence in the event of a future accident.
Enforce a driver risk profile and intervention system
HR should establish a risk profile for each employee driver based on MVR reports. Including a points equalization system is helpful since different states use incompatible points systems on MVRs to represent violations. When an employee’s risk profile crosses a specified threshold based on the company’s points system, an intervention is triggered, such as mandatory completion of a driver safety course or even termination if necessary.
Conclusion: FAVR is suitable for management and good for the workforce
A strong vehicle reimbursement program protects the interests of valued employees while strengthening the organization as a whole. Your workforce is your organization. They do the work and carry institutional knowledge and culture that keeps the organization stable long-term.
If your vehicle reimbursement program does not attract and retain the kind of people who bring long-term success, if it does not protect your people from financial and safety hazards, then it is critical to update the policy.
Your HR department should prioritize these updates. Developing an equitable vehicle reimbursement policy is not simply improving your benefits package. Proactively reducing the risk of employee vehicle accidents while ensuring that all employees are reimbursed fairly will promote a culture of care for employees while protecting the organization.
In summary, our recommendations for a robust, equitable vehicle reimbursement plan:
- Adopt a FAVR reimbursement program, which guarantees accurate, equitable, compliant vehicle reimbursements.
- Establish mandatory minimum insurance coverage and require employees to update their proof of insurance coverage every six months.
- Establish a Driver Safety Policy that includes routine MVR checks, proactive measures to promote safe driving, and interventions to correct unsafe driving.
For guidance on how to explore and implement these policies, contact mBurse today. We can provide a free comparison between your current reimbursement program and a FAVR program, as well as guidance on how to follow best practices with your other policies governing mobile employees.
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