In today’s post-pandemic environment, buying fleet vehicles has become a challenging endeavor for those managing vehicle programs. A worldwide semiconductor chip shortage has led to production cuts around the globe, which in turn has resulted in numerous factory closures, supply chain issues, lower dealership inventories, and price hikes. Unfortunately, this isn’t an issue that will disappear anytime soon; industry analysts are now predicting that carmakers won’t be able to produce enough new vehicles that will allow dealers to begin building up their inventories until late 2023, and possibly not until early 2024.

For fleet managers, this means that sourcing new vehicles to lease has become immensely harder—and oftentimes impossible. Until supply bounces back, fleet managers who desire to replace or add vehicles to their fleets are in a tough spot.

Fortunately, there are alternative options to company-provided fleet programs for those who are unable to wait to provide this asset to their teams. The most practical—and cost-effective—solution is to reimburse employees for the business use of their personal vehicles.

The key to a successful reimbursement program is proper administration. If a company is not reimbursing an employee accurately—even if unintentionally—that company opens the door to the threat of lawsuits, both at the federal level and within states with stringent labor laws.

Under the Fair Labor Standards Act, costs incurred by employees that are considered reasonably necessary to their work for the employer count against employee wages, exposing employers to potential minimum wage violations. Furthermore, a growing number of states independently require the reimbursement of employees who use their personal vehicles to conduct business—even if they’re using that same vehicle for personal use. California, for example, requires companies to accurately reimburse employees for all necessary business-related expenses under California Labor Code Section 2802, which includes automobile expenses. Other states already mirror some of California’s legal requirements, such as Massachusetts, Illinois, South Dakota, North Dakota, Montana, Iowa, the District of Columbia, and New Hampshire.

While employers are allowed under federal labor law to “reasonably approximate” the amount of an employee’s expenses incurred, there are several important considerations to do this accurately. The calculation of the reasonably approximated cost of using a vehicle should include costs such as depreciation, fuel, maintenance and tires, license and registration fees, and insurance.
Is a reasonable approximation fair to the employee? Driving costs are a mix of fixed and variable components. While fixed costs are constant month over month, they vary from employee to employee due to factors such as vehicle type, miles driven, and where the employee lives. These costs include insurance premiums, license and registration fees, taxes, and depreciation. Variable costs, on the other hand, vary month over month and are based on the number of business miles an employee drives, in addition to where they drive. These include gas, oil, maintenance, and tire wear. If these differences aren’t accounted for, employers can unintentionally overpay some employees and underpay others.

With employees driving the same car for personal and business reasons, these costs will fall under both the personal and business-related use of the vehicle. Under the law, employers would need to apportion these expenses to the time used by the employee on behalf of the employer. There are a few ways to accomplish this. For example, employers can reimburse on a per-mile basis by calculating the total annual cost of these expenses and recording the business use of the vehicle through mileage reimbursement programs. These types of programs are best suited for companies with a smaller number of drivers in a specific location who drive no more than 5,000 miles annually.

Companies with high-mileage driving employees spread over several states should look to alternative mileage reimbursement options, such as Fixed and Variable Rate (FAVR) programs. Through FAVR programs, fleet managers provide reimbursements based on the specific fixed and variable costs of operating a vehicle, scaling according to the amount of mileage people drive. FAVR programs also account for the geographic cost differences in each employee’s location. As company fleets become increasingly expensive to maintain—something that is compounded by dwindling car inventories and rising prices—FAVR programs can minimize cost overruns, while still providing equitable reimbursements for employees.

There are significant penalties for under-reimbursement in violation of state or federal laws, making ballpark reimbursement policies a risky endeavor. Reimbursing employees for their individual costs is the most accurate way for fleet managers to ensure they are compensated the exact cost of conducting business with their personal vehicles. Whether through mileage reimbursement or FAVR programs, it’s possible for fleet managers to create compliant vehicle programs via employees’ personal vehicles while they wait out the impacts of the car chip shortage.