Vehicle Programs Background
Coordinating processes across an organization comes with the job of an operations leader. From managing your mobile workforce to ensuring operational efficiency in the field, it’s no small task. It’s no wonder operations leaders constantly look for ways to improve the company’s processes. The rise of mobile workers has increased pressure on Operations leaders to improve efficiency within their driving teams.
While some mobile workers will require specialty vehicles to keep daily operations afloat (e.g., those who drive delivery trucks, such as 18-wheelers), non-specialty drivers such as sales and merchandising teams don’t need specific vehicles to do their jobs. For these mobile workers, driving their own personal vehicles for work makes the most sense.
For non-specialty drivers, companies have a variety of vehicle program options to offer their workers, including:
Flat Car Allowance
Cents-per-mile
Fleet Vehicle Programs
However, instead of administering just one of these programs, many companies administer multiple types of programs. Why? Because each one is uniquely suited for different business objectives.
Here’s an example …
A company provides their executives with a high-end vehicle as part of their hiring package. In this case, companies are managing a small, but expensive fleet in addition to gas cards exclusive to their executives.
What about everyone else, though?
Most companies won’t provide their entry-level employees with luxury vehicles because of the cost of purchasing and upkeep. Instead, companies often issue a cents-permile rate that accurately captures their high mileage – but it doesn’t end there.
What about the mid-level sales managers?
They’re on the road more than executives, but less than entry-level employees. Due to their position, they also expect a richer reimbursement. The company reimburses them with a flat allowance of $500 a month and a gas card.
Companies can administer and maintain a flat allowance, cents-per-mile and fleet vehicle program at the same time in order to achieve their hiring and business needs.
The problem with administering multiple vehicle programs at once is the expense. Companies don’t realize how much this practice ends up costing them. That expense extends beyond the costs of the small inefficiencies associated with each program to the administrative burden of maintaining separate programs.
The financial burden resulting from multiple programs can become even greater as companies are required to properly reimburse their driving employees as required by the IRS. The wide range of driving expenses include fuel and maintenance costs, depreciation, insurance and more. Each vehicle program has its own set of reimbursement calculations that companies must carefully consider. Failure to accurately capture and reimburse mileage may result in costly IRS audits or class-action lawsuits.
The problem with administering multiple vehicle programs at once is the expense. Companies don’t realize how much this practice ends up costing them.
Learn About The Risk And Potential Cost to Your Business
Failing to provide fair and accurate mileage reimbursements to employees could cost your business millions. Even the most well-known brands and corporations have faced reimbursement-related lawsuits. Consider the cases of Dominoes and Starbucks. Employees filed class-action lawsuits against both companies.
- Delivery drivers working at multiple franchisees claimed the flat reimbursement rate they were given was below minimum wage.
- The coffee chain settled a class-action lawsuit for $3 million when employees alleged the company never reimbursed them for business mileage incurred on their personal vehicles.
The Cost of Vehicle Programs
Companies commonly use a combination of car allowance, cents-per-mile or fleet vehicle programs, yet all three of these options can cause companies to lose thousands of dollars per employee each year.
How? To put it simply, these programs lack fairness and accuracy.
Car Allowance
To keep their program simple, companies use car allowances (for example, $300 a month per employee). This resolves the problem of complex expense calculations. However, car allowances ignore variances in the costs of driving, such as insurance premiums, property taxes and fuel prices. These fluctuate considerably by location.
Moreover, allowances are subject to both Federal Insurance Contributions Act (FICA) taxes for employers and income taxes for employees. Because of this, providing a f lat allowance of $300 costs an organization $322 after taxes, while employees take home only $225.
The costs of this “simple” solution quickly outweigh its convenience.
Car allowances also fail to deliver fair reimbursement to employees. No two business trips are the same, so no two employees should be reimbursed the same amount. This factor may convince some companies to use a cents-per-mile program. However, cents-per-mile programs also have failings.
CPM
Cents-per-mile reimbursements typically work well for employees who drive sparingly for business, mainly due to the fact that reimbursements only occur when employees drive for work (as opposed to year-round). However, cents-per-mile reimbursement programs can be very costly.
Most companies that administer a cents-per-mile program use the IRS business mileage rate to calculate what each individual employee should be paid back. However, the IRS rate is not recommended for reimbursement. The IRS share the rate annually as a guideline.
Reimbursements above the IRS business mileage standard are taxable. However, it’s impossible for this rate to account for each employee’s unique local costs and labor laws.
Fleet
A fleet vehicle program – where the employer provides company-owned vehicles for business use – is another popular option. Companies can influence the perception of their brands by selecting a specific vehicle type, make and model that best represents their image and values.
Leasing or purchasing fleet vehicles can be a problem for companies in many ways. Fleets are the most expensive vehicle program.
These create both legal risk and further administrative work for your business. Also consider employee turnover. The typical time frame from posting a job to having an employee at work is three months. In that time, fleet vehicles are depreciating in lots, still requiring regular maintenance, waiting for the next employee.
Finally, there’s employee personal use. Is your company willing to eat the costs for non-business-related trips, or will you seek to recover some of those costs? If you do want to recover personal use costs, how will you fairly and accurately track the appropriate chargebacks? Though presented as a perk to employees, this is actually a large company liability. If an employee is found at fault in an accident involving a company vehicle, the plaintiff will go after the company.
FAVR: The One-Stop Shop
No matter what combination of vehicle programs a company administers, every trip must be tracked, documented and reported to the IRS in the event of an audit.
Without compliant mileage logs, your company is exposed to an IRS audit. While the employee would be responsible for paying penalties and back taxes, it raises an important question: could a failed audit cause the IRS to take a deeper look into other driving employees or the company as a whole?
It is critical for companies to find an approach to reimbursement that streamlines the process using fair and accurate calculations.
The fixed and variable rate (FAVR) is the only IRS recommended methodology. FAVR is the most accurate reimbursement solution. It provides every mobile worker with a customized reimbursement based on their actual local costs and business mileage, which may vary month to month.
With today’s technology, there is no excuse — companies must streamline their reimbursement processes.
The FAVR program reimburses employees tax-free for both the fixed (insurance, license and registrations fees) and variable (fuel, maintenance) costs associated with driving for business. Tracking these costs may seem time-consuming. Fortunately, technological advancements now make implementing and maintaining FAVR programs straightforward.
In the past, manually tracking, documenting and reporting mileage for every worker could be overwhelming. With today’s technology, there is no excuse. Companies must streamline their reimbursement processes. Using GPS-enabled cell phones and geographically-sensitive data, FAVR programs allow for the full range of costs involved in driving personal or company-owned vehicles for business to be measured in real-time, which creates employee-specific repayments.
What Comes Next?
There are several reasons why Operations leaders implement multiple vehicle programs – employee seniority, job function, improved accuracy. No matter the reason, the bottom line is simple. Companies need a vehicle program that suits their business needs. FAVR programs provide the accuracy and flexibility that make it the best solution to achieve this goal.
With the rise in today’s mobile workforce and several technologies available, the time has come for companies to consider streamlining their operations. By choosing one centralized vehicle program, companies can create cost savings, mitigate legal risk and still achieve their goals.