Looking Under the Hood at Traditional Vehicle Programs

In our first article of this three-part series on creating an effective, equitable vehicle program, we explored the challenges that companies face in determining the right program for high-mileage drivers. As per-driver mileage rises, so does the risk profile for companies employing mobile workforces. Consider these exposures, particularly acute for employers of drivers logging more than 5,000 reimbursable miles annually:

• Vicarious liability: Companies can be held responsible for incidents involving their employees and fleet vehicles, even during non-working hours.
• Tax laws: Mileage reimbursements that exceed the Internal Revenue Service (IRS) Standard Mileage Rate are taxable as income, with both employer and employee responsible for applicable FICA taxes.
• Mileage fraud and miscalculations: Manual mileage and vehicle expense recording processes make it far easier to make mistakes, whether they are accidental or intentional.
• Volatile fuel prices: Fuel prices rise and fall according to global market influences. Additionally, regional price differences vary greatly across the U.S. These fluctuations can complicate cash flow and future spend management if not carefully handled.
• Employee dissatisfaction: Inequitable, inaccurate, or inadequate reimbursement can lead to employee frustration and even litigation.

It’s no surprise that numerous companies have lost lawsuits related to vehicle program reimbursement related class actions. While the three most common programmatic approaches – flat car allowance, cents-per-mile reimbursement, and fleet vehicles – feature both advantages and shortcomings, the one commonality is that each can expose companies to significant risk.  

Flat car allowance

With flat car allowance, the company pays a predictable flat amount per month per employee. That amount, however, is the same each month regardless of actual work-related mileage driven. Employees who incur higher actual costs might object to being given the same allowance as others whose costs are lower, elevating risk of dissatisfaction and/or litigation. Allowances are also considered taxable income by the IRS and are subject to FICA and income taxes (both federal and state), which means the employee will not receive the full allowance amount and the company experiences tax waste.

Cents-per-mile

Considered a simpler way to reimburse drivers, cents-per-mile reimbursements are actually inequitable, as they tend to be less than the actual costs incurred by low-mileage drivers and more than actual costs incurred by high-mileage drivers. The potential for fraud exists if employees opt to drive more than needed to receive higher reimbursements or less than needed to avoid wear-and-tear that the reimbursements will not be enough to cover. Regional variances in costs such as fuel, insurance, and maintenance, also lead to inaccurate reimbursements.  

Fleet vehicles

While fleet vehicles are generally viewed as an employee benefit, the company that administers them assumes 24-hour risk and is liable for the vehicle even when it is being used for non-work purposes. The risk is significant, as company-owned fleet vehicles are associated with accident rates as high as three times the national average for U.S. drivers. In addition, the company must still absorb lease, maintenance, and administrative costs even for idle vehicles.

There is, however, another way. In our final article, we’ll explore how a fixed and variable rate (FAVR) approach ensures that reimbursements are accurate and fairly calculated for the benefit of both employer and employee.

To learn more, see the Infographic: All Roads Lead to FAVR