Ask yourself these questions. With an employee-provided vehicle, how do you ensure it is properly maintained? How do you know the condition of the tires? What about the brakes? How do you know when an employee postpones a safety-related repair? If an accident is caused by deferred maintenance, what is your liability exposure if it occurred while conducting company business?

The reality is that it is difficult, if not impossible, for a company to be aware of the condition and maintenance of every employee’s vehicle. In fact, a reimbursement program may actually contribute to poorly maintained employee-owned vehicles. For instance, if the reimbursement is not sufficient to cover actual expenses, the employee may defer preventive maintenance. Also, since maintenance is an out-of-pocket expense there may even be a temptation (or financial necessity) to postpone more expensive mechanical repairs. The bottom line is that a business has little or no control over the condition of an employee’s personal vehicle.

Inadequate Auto Insurance Coverage

If a vehicle is not provided by the company, then the company must be certain that the employee has sufficient insurance to protect it from liability exposure should an accident occur while the driver is on company time. It is difficult and time consuming for a company to confirm driver compliance with its insurance requirements. If a personal vehicle is used for work, an employee needs to carry “business” insurance, which is more expensive than personal insurance. Also, the increased miles driven annually, as a result of work, will result in a higher premium. Minimum liability coverage should be established if a personal vehicle is used for business. Also, an employee’s auto insurance should include sufficient uninsured/underinsured coverage, rental reimbursement, and towing.

All of this could be very expensive for employees since the reimbursement may be inadequate to cover the additional insurance expense. In addition, a company should require that insurance be obtained from a financially solvent insurer. All of this involves administrative expense and corporate overhead to ensure that adequate insurance coverage has been purchased and that it is renewed each year. By switching to a car allowance program, some companies believe they can dramatically minimize insurance exposure. These companies may avoid some cost of damage because the employee’s insurance is primary; however, they may still be sued for the liability exceeding the employee’s insurance coverage. Sometimes employees will buy a cheaper vehicle to pocket money from the company allowance. They will seek out the lowest payments possible through longer terms because they think they can “make some extra money” by doing so.

Also, an employee may buy or lease a vehicle that is less safe than a typical company vehicle, which exposes the driver and the company to a higher risk in the case of an accident. Most fleets equip their vehicles with all of the available safety options. This may not be the case with employee-owned vehicles. If employees provide their own vehicles, some may not have safety features such as side-impact airbags (or even passenger-side airbags on an older vehicle) or anti-lock brakes.

Difficulty Restricting Drivers

Under a reimbursement program, a company still needs to set up policies and guidelines governing the use of a personal vehicle to conduct company business. However, it is difficult to get employees to comply with company policy. A company should still monitor motor vehicle record (MVR) checks of employees using their personal vehicles. Unless you do so, how do you know if the employee representing your company is driving without a valid license or with a DUI conviction? To protect against this, companies need to update employee MVRs annually or semi-annually.

Another problem with driver reimbursement is the inability to restrict who can drive a vehicle, such as spouses, children, and significant others. For instance, some industries need to regulate who can drive a vehicle, such as pharmaceutical companies since some vehicles may be used to transport drug samples. When you consider that an employee vehicle may be less safe than a company-provided vehicle and that it may have insufficient insurance coverage, along with the overhead expense to maintain an MVR program and to monitor insurance compliance, it is apparent that a driver reimbursement program decreases driver safety and increases corporate liability exposure.

Let me know what you think.