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Why is Driver Reimbursement the Wrong Choice? Here are 30 Reasons

June 27, 2004, by Mike Antich

1. Loss of Competitive Allowance Program (CAP) Monies from Factories
Oftentimes, manufacturer fleet incentive programs, such as competitive allowance programs (CAP), are structured based on reaching tiered volume purchasing levels. A re-imbursement program, in which some employees are re-quired to use their own vehicles, would decrease a com-pany’s fleet volume and its eligibility for additional CAP monies. 2. High-Mileage Drivers are Upside Down in Reimbursement
High-mileage drivers will usually be upside down at the end of a lease with a balloon payment due for over-mileage. When the driver leases a vehicle in a closed-end personal lease, they are subject to excess mileage charges, which can be prohibitively expensive in high-mileage fleet usage. As a result, an employee will need to replace their personal vehicle sooner because they quickly accumulate high mileage, but negative equity prevents employees from doing so unless the company intervenes with special com-pensation assistance. 3. Inadequate Insurance May be Carried by Reimbursed Employee
If a vehicle is not provided by the company, then the company must be certain that the driver has sufficient in-surance to protect it from exposure should there be an acci-dent while the driver is on company time. An employee needs to carry ‘business’ insurance, which costs twice as much as personal insurance. The reason for this is if the employee is involved in an accident and does not have ‘business’ insurance on the unit, the carrier for the personal insurance can deny the claim on that person’s incurred loss because he had not advised the carrier he was using his personal vehicle for business. When liability insurance premiums are paid by the com-pany, there are no surprises on coverage or payment. With driver reimbursement, the driver may not carry adequate liability insurance, which puts the company at increased risk. 4. Added Tax Burden for Drivers and the Potential of an IRS Audit
If not handled correctly, reimbursement can be consid-ered taxable income by the federal government and some states. Car allowances are taxable to the employee and the company is subject to its portion of FICA tax. In addition, reimbursed employees may be subject to possible IRS au-dit. Mileage expense is auditable. 5. Company Might Have to Make Loans to Cash-Strapped Employees for Vehicle Repairs
Will the reimbursement provided by a company to an employee driver be used for a vehicle or to make a college, mortgage, health, or insurance payments? Often, salespeople whose job requires their use of a ve-hicle are recruited straight out of college. At this young age, many employees have little or no credit history, often no cash for down payments, and little experience in buying or leasing cars. Many fleet managers report that these younger employees often need the company to be a co-signer of a loan and lease. Other fleet managers report that sometimes employees run short of cash and have to ask the company for a loan to repair their personal vehicle to con-tinue working. 6. Employee Gets a ‘Pay Cut’ With Inadequate Reimbursement
Cost of gas (especially today), insurance, personal property tax, registration fees, and maintenance of vehicles vary substantially. There are not many companies that re-imburses mileage at a rate that fully compensates a driver for the actual cost of operating a vehicle. The driver ends up with a reduction in pay because he or she now has to make up the difference between the reimbursement amount and the actual cost of operating the vehicle. Also, there are geographic inequities in some reimbursement programs 7. Unable to Monitor Condition of Employee Vehicles
With an employee-provided vehicle, how do you ensure it is properly maintained? With driver reimbursement, the company is not aware of the vehicle's condition and main-tenance. Is the oil being changed at 3,000 mile intervals, as it is done on fleet units? Are the tires in safe driving condi-tion? What about the brakes? Who will monitor this? 8. Reimbursement Offers Less Control of Employee Safety
Under reimbursement, an employee can buy or lease a less safe vehicle which exposes the driver and the company to a higher risk of serious injury in the case of an accident. If employees are providing their own vehicle, they may not have side-impact airbags (or even passenger-side airbags on an older vehicle), anti-lock brakes, and daytime running lights. 9. Employees Are Reluctant to Perform Work that May Damage Their Personal Vehicle
A fleet manager knows a company-provided vehicle is being used for company business rather than having a truck rented because an employee does not want to damage the inside of their personal vehicle. 10. Increased Temptation to Defraud the Company
Reimbursement opens the door for the padding of busi-ness mileages in order to increase allowances. 11. The Perk of Buying a Used Company Vehicle is Eliminated for Employees
Employees may be interested in the benefit of buying the vehicle when its useful life at the company is com-pleted. This perk is eliminated when employees are reim-bursed for their personal vehicle. There is also the em-ployee perception that a perceived fringe benefit has been eliminated. Many sales and service personnel consider the purchase of their used vehicles a fringe benefit. 12. Company Loses Dividends of Resale Profit
In a strong used-vehicle market, the additional revenues derived in the resale of a company vehicle go straight to the company’s bottom line. This revenue source, albeit unpre-dictable, would be lost in reimbursement. 13. Reimbursement of Deductibles for Non-Business Accidents
Currently, many fleets that offer company-provided ve-hicles don’t charge drivers the cost of a deductible should an accident occur. Under reimbursement it would become more common for companies to reimburse employees for the insurance physical damage deductible for an employee vehicle involved in an accident while performing work-related business. However, increased administrative over-sight would be required to ensure that the accident occurred during a business trip. 14. A Hiring Advantage is Eliminated
Providing a company vehicle gives your company a competitive edge in hiring top-caliber salespeople, techni-cians, and managers. A company-provided vehicle can be used as a recruiting tool and company benefit. Past industry surveys have shown that prospective employees view a company vehicle as an equivalent benefit to health care coverage and pension benefits. 15. Use of Employee Vehicles Increases Liability Exposure
Some companies believe that they are eliminating insur-ance exposure with a car allowance. These companies may be avoiding the lesser amount of the damage because the employee’s insurance is primary; however, they are still responsible for the liability exceeding the employee’s in-surance coverage. Ask yourself, what is your liability expo-sure if the employee postpones safety-related repairs? A company-provided vehicle allows you to control these vari-ables and minimize this liability exposure. 16. Employee Productivity Will Decrease
A business that does not provide a company vehicle has little or no control over the condition of the employee’s vehicle. If the amount of reimbursement by the company is not sufficient to cover actual expenses, the employee may defer preventive maintenance, which can lead to break-downs, downtime, and unnecessary car-rental expense. Also, since preventive maintenance is an immediate, out-of-pocket expenses there is a temptation on the part of the employee to postpone routine maintenance, as well as more expensive mechanical repairs. 17. Reimbursement Has Negative Affect on Driver Morale
A company-provided vehicle helps create high em-ployee morale. Drivers don't have to worry about getting insurance, paying for unexpected major repairs, and routine maintenance. On the other hand, driver reimbursement can negatively affect driver morale since some drivers will be overpaid while others underpaid. 18. Wrong Company Image May Be Projected
A company vehicle is part of your corporate image pre-sented to the world. With driver reimbursement, an em-ployee determines whether a vehicle is appropriate to the type of image the company wants to project. On the other hand, a company-provided program allows you to control the suitability and appearance of the vehicles used for your business. When an employee provides the vehicle, you surrender this control. The wrong vehicle can send the wrong message to your customers. The problem that a reimbursement program creates is when someone is hired who already owns a vehicle, the company will most likely have to accept whatever he or she is driving. 19. Costs are Unfairly Shifted to Employees
It is more expensive for employees to use their personal vehicles for business than it is for a business to offer com-pany vehicles. As a volume vehicle buyer, a company can acquire vehicles at wholesale cost, while employees must pay retail. Second, a company can finance a vehicle at a cheaper cost than an employee. A company also has lower vehicle maintenance costs by participating in a national account program, while an employee typically pays retail. No matter what cost category is examined, a company-provided program is less expensive than driver reimburse-ment. 20. Advantages of Professional Fleet Administration Not Used
A company-provided fleet is easier to manage with one payment to a leasing company rather than processing nu-merous expense reports. There are 11 advantages of profes-sional fleet management: 1. Ensures correct vehicle specifications. 2. Expedites vehicle maintenance. 3. Monitors and negotiates on vehicle maintenance, parts availability, service work, and scheduling. 4. Pursues accident reimbursement. 5. Serves as liaison in lawsuits resulting from auto acci-dents. 6. Audits and/or pursues warranty reimbursements. 7. Audits and/or pursues manufacturer and lessor re-bates. 8. Responsible for keeping daily rental car rates to a minimum. 9. Audits sale of used vehicles. 10. Ensures that fleet reporting is consistent and in com-pliance with applicable tax laws. 11. Provides safe driving materials to reduce accident expense and time away from work. 21. Ability to Provide Proper Vehicles for Fleet Applications is Restricted
A key problem with reimbursement is the inability to provide the proper vehicle for the job function. Specific fleet applications require specific types of vehicles; how-ever, in a reimbursement program a company loses control of this. 22. A Company-Provided Fleet Is Less Expensive
For the majority of companies, it is less expensive to provide a company vehicle program. Why would a com-pany want to reimburse an employee $600 per month for a vehicle they can operate at a rate of $400 per month. 23. Reimbursement Still Requires Monitoring Employee MVRs
Company-provided vehicles offer a better opportunity to monitor driver behavior by a required annual DMV checks. Even with a driver reimbursement program a company should still monitor MVRs. 24. Many Employees Will Buy the Least Expensive Vehicle
Often, drivers seek the lowest payments possible through longer terms because they think they can ‘make some extra money’ by doing so. 25. Reimbursement Perceived to be Part of Compensation
Often a reimbursement allowance is seen by the em-ployee as part of his or her personal income. When it is time to replace the current vehicle, the employee may re-sent the outlay of a large sum of money. 26. Inability to Regulate Personal Use of Employee Vehicles
With driver reimbursement, there is an inability to re-strict who can drive a vehicle. For instance, with some in-dustries, it is important to regulate who can drive the car (such as no one other than an employee and spouse) be-cause, in the case of pharmaceutical companies, some of these cars may contain drug samples. 27. Difficulty in Getting Employees to Comply with Company Policy
Under a reimbursement program, a company still needs to set up policies and guidelines regarding the use of their personal vehicle to conduct company business. Administra-tively this is burdensome and extremely difficult to moni-tor. 28. Ability to Transfer Vehicles Between Employees is Lost
A company-provided vehicle fleet has the ability to transfer vehicles to other employees, which is eliminated in a reimbursement program. 29. Lack of On-Vehicle Advertising Opportunities
A company loses its ability to advertise the company on personal vehicles. 30. Certain Government Regulations Prohibit the Use of Employee Vehicles
For example, in the pest control industry it is against EPA regulations for anyone to carry chemicals in their ve-hicle without the proper storage away from the passenger compartment. Similar prohibitions exist in other industries. Let me know what you think.

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Author Bio

Mike Antich

Editor and Associate Publisher

Mike has covered fleet management and remarketing for more than 20 years and entered the Fleet Hall of Fame in 2010.

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