The Invisible Financial Risks of a Mobile Workforce
The CFO’s guide to protecting your budget from the hidden costs associated with employees who operate a vehicle for work purposes
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Introduction: Mobile employee risk
What is your risk profile when employees hit the road?
Any organization with a mobile workforce faces significant risks. Vehicle crashes cost U.S. employers $72.2 billion in 2019, according to the most recent study by the Network of Employers for Traffic Safety.
The financial risks are high whether your organization operates a fleet of company-owned vehicles or employs workers who drive their vehicles. These risks derive from several sources, some obvious, some less so.
The financial risks of a mobile workforce
This guide considers numerous sources of financial risk
associated with employees who drive as part of their jobs:
- Liability from uninsured and underinsured employees
- Negligent entrustment suits from traffic incidents
- Labor codes that indemnify employees from work-related expenses
- Off-the-job driving (including personal use of company vehicles)
- IRS taxation and reimbursement rule violations
Throughout this guide, we will offer best practices for mitigating the costs associated with each source of mobile workforce risk.
Risk One: Insurance liability
Business insurance vs. employee insurance
If your organization owns or leases any vehicles, then your organization has business vehicle coverage. This insurance coverage is likely robust, around $1 million per incident, especially if you operate a fleet of vehicles.
But what if your employees operate personal vehicles to visit clients, make sales calls, travel between job sites or offices, run errands, or make deliveries? These vehicle trips can bring unexpected liability for employee-caused accidents.
If an employee causes an accident while on the job, and their insurance is insufficient to cover the bodily injuries and/or property damage caused, the victims will seek recourse with the employer. This extension of liability is made possible by the legal doctrine of respondeat superior (“let the master answer”). Because the at-fault driver was on the job, the employer can be held liable for damages or injuries caused by the driver.
Setting minimum employee auto insurance coverage
To reduce the financial risks posed by uninsured or underinsured employees, it is important to set a mandatory minimum coverage requirement for each employee who operates a vehicle on the job.
The best practice is to require each employee to carry the following liability limits:
- 250,000 per bodily injury
- 500,000 total bodily injuries
- 250,000 property damage
Verifying employee insurance coverage bi-annually
It is crucial to verify employees’ auto insurance coverage routinely. A best practice is to verify insurance coverage every six months since most insurance policies renew bi-annually.
The last thing you want is an accident to occur after an employee’s insurance coverage has lapsed or been reduced.
The easiest way to ensure compliance with company policy is to tie the insurance verification to compensation or reimbursement for vehicle use. Here’s how:
- Require new employees to upload their auto insurance declarations page during onboarding.
- Require current employees to upload an updated auto insurance declaration page every six months.
- If the auto insurance dec page is not updated, then pause payment of the employee’s car allowance or reimbursement until the update occurs.
Risk Two: Negligent entrustment
Lawsuits based on respondeat superior
Because of the legal doctrine of respondeat superior, an employer can be held liable if an employee’s action can be ascribed to negligence on the employer’s part. The result is a negligent entrustment lawsuit.
Say an employee causes a traffic accident on the job that results in a fatality. The employer can be named in a wrongful death lawsuit if evidence can be produced that the employer took insufficient steps to ensure the safety of drivers in its fleet.
One 2016 wrongful death verdict cost an employer $22.7 million after an employee killed one person and injured another while driving under the influence.
Here are two best practices to protect your organization from negligent entrustment suits.
1. Regular motor vehicle record checks
If an at-fault motorist injures or kills someone, and red flags are found on their motor vehicle record, that can be sufficient to find the employer negligent. Speeding tickets, reckless driving charges, and DUIs are all sufficient causes to show that a driver was a known source of harm.
2. Safer driver program
A safer driver program includes a written set of driver safety policies and a plan for interventions when an MVR check reveals a violation, including termination of employment. Here are several key components of an effective, safer driver program:
- Risk profiles - each driver is assigned a risk score; above minimum triggers an intervention
- Driver safety policies - no mobile phone use while driving, safe driving distances, etc.
- Driver safety training - incentivized driver safety course (required if risk score increases)
- Safe driving culture - company practices that encourage compliance with safe driving
- Drug testing - pre-employment and reasonable suspicion drug testing
Risk Three: Labor code violations
Labor laws that require reimbursement of vehicle expenses
Nine jurisdictions in the United States legally protect employees from incurring expenses that rightly belong to their employers. When an employer does not comply by fully reimbursing employees for all business vehicle expenses, they can face fines and class action lawsuits.
In 2019, a former ADT employee was awarded $11,255 under California’s labor code, section 2802, due to insufficient vehicle reimbursement over the course of one year. Class action judgments and settlements can total in the millions. It pays to ensure your company’s vehicle reimbursement policy is labor-code compliant.
Which states have business expense indemnification codes?
The following nine jurisdictions indemnify employees from business expenses:
California
Illinois
Massachusetts
Montana
North Dakota
South Dakota
Be aware of additional employee-friendly states, such as Michigan and New York, where lawsuits have occurred due to under-reimbursing employees. Furthermore, both New York and Pennsylvania state laws require employers to follow through with contractually promised reimbursements on time.
How to comply with state labor codes that govern business reimbursements
Adopting a compliant vehicle reimbursement plan is important if you have employees working in any of the twelve places listed above. Many jurisdictions recognize the IRS business mileage rate or a fixed and variable rate allowance (FAVR) as acceptable ways to comply. Whichever route you take, your plan must meet the following criteria:
- Accurate: Use rates derived from geographically sensitive vehicle expense data
- Equitable: Fairly reimburse both high-mileage and low-mileage drivers
- Defensible: Be able to demonstrate that all reasonable costs are covered (fuel, oil, tires, maintenance, insurance, depreciation, registration/license, taxes)
Risk Four: Off-the-job driving
The costs of personal use of a company vehicle
If your organization provides vehicles to employees, their personal use can become a costly liability. For employees, a company-provided vehicle is a huge perk. It may have been a significant factor in attracting some employees to work for your organization.
But personal use of a company vehicle can also add unexpected costs to your bottom line. These costs come in the following forms:
- Use of fuel on the weekends / outside work hours
- Wear and tear on the vehicle during non-business travel
- Vehicle accidents outside work hours
- Taxes on vehicles for non-business use
Ways to lower the financial risks of personal use of a vehicle
With the right policies and practices in place, your organization can rein in the personal use of business vehicles and decrease financial liabilities.
1. Restrict fuel consumption
You can limit how many times per week employees may use the company credit card to fill their gas tanks without permission, or you can restrict fill-ups to specific days of the week. The IRS treats any company-funded fuel used for personal trips as taxable income.
2. Establish and enforce a personal use chargeback policy
Because negligent entrustment lawsuits can cost millions of dollars, some organizations opt for continuous monitoring in lieu of annual MVR checks. This alternative is expensive, but the employer knows immediately when an employee has been charged with a moving violation.
3. Establish and maintain a driver safety policy
We already covered this for personal vehicles (above). The same policies should be in place for company vehicles, as well as a prohibition against drivers not listed on the company insurance policy.
Risk Five: IRS compliance
Whether you operate a company fleet or your employees use personal vehicles, your organization faces two IRS-related areas of risk: tax audits and tax waste.
How to avoid a costly IRS audit of your business vehicle program
If the IRS audits your organization, your business vehicle program will be scrutinized. You do not want a situation in which you face thousands of dollars in unexpected liabilities. Here are steps to take now to avoid that kind of mess:
Properly withhold taxes on
taxable portions of your vehicle program.
If your organization pays a standard vehicle allowance to employees, the entire amount is considered taxable compensation. You must withhold income and payroll taxes on that amount for each employee. Your organization must also pay its share of the payroll taxes on that amount. If you provide a company vehicle or a fuel card, any personal use should be charged back to the employee or treated as income.
Properly substantiate business use of non-taxable goods and payments.
If your organization pays a mileage reimbursement, use an IRS-approved method to prove business use of the payments. Today’s mileage-tracking apps can provide accurate reports on business trips and integrate with your organization’s expense portal or payroll system.
Similarly, business mileage should be tracked and reported accurately to avoid tax liability if you provide a company vehicle or a fuel card. All mileage should be recorded and reported in a timely manner – reconstructing trips during an audit is a nightmare.
How to calculate and decrease your organization’s tax waste
If your organization pays a taxable car allowance, you are paying for the simplicity of your program. The payment method is gratuitous taxation, which weighs heavily on the employee. Taxes reduce car allowances by 30 to 40%, even more in states with high-income taxes.
You can reinvest tax money into the organization and its employees by switching to a non-taxable reimbursement method, such as fixed and variable rate, mileage substantiation, or mileage reimbursement.
Use the mBurse tax waste calculator to see how much you could save.
Conclusion: Conduct a business vehicle policy audit
Now that you know the scope of hidden costs associated with your mobile workforce, take the time to conduct a thorough audit of your organization’s vehicle policies.
- Insurance liability - Set a new minimum insurance coverage for employees and verify using the reimbursement system
- Negligent entrustment - Conduct regular MVR checks and establish or update driver safety policy/program
- Labor code violations - Determine whether you have employees subject to indemnification codes and take appropriate steps
- Personal use of a company vehicle or fuel card - Update and strictly enforce a personal use chargeback policy
- IRS compliance - Properly withhold taxes, conduct personal use chargebacks, calculate savings from a non-taxable program