An ongoing question asked by corporate management is whether it makes better business sense to provide company vehicles for employees or reimburse them for the use of their personal vehicles. Invariably, this question gains increased scrutiny when there is senior management pressure to reduce costs. Since fleet is typically one of the top five spend categories, it is a ready target for scrutiny.
Some corporate managers feel an employee reimbursement program costs less than offering company-provided vehicles. Shifting the burden of the company vehicle program to employees may seem, at first, to be the ideal way to accomplish cost reductions. But, a closer examination shows this may not be the case. If your company spends less by going to driver reimbursement, it is because your employees are shouldering the hidden costs. In fact, after closer analysis, reimbursement may actually be the more expensive option, and directly harm employee productivity and corporate image in the marketplace.
Here are 30 reasons why reimbursement doesn’t work:
1. A Hiring Advantage is Eliminated
Providing a company vehicle gives a business a competitive edge in hiring top-caliber salespeople, technicians, and managers.
This is especially true if key competitors do not offer a company car program. A company-provided vehicle can be used as a recruiting tool and company benefit. Repeated industry surveys show prospective employees view a company vehicle as an equivalent benefit to health care coverage and pension benefits.
By not offering a company vehicle, employee recruitment and retention may be adversely affected. A company car is a positive recruitment tool. Competitors will use a company car as an incentive to recruit employees away from companies. Conversely, efforts to hire a prospective employee who already has a company car at a company that only offers reimbursement would be handicapped because of the large outlay of money that would be required to purchase a new car and insurance.
Many companies, especially those in the pharmaceutical industry, must provide competitive compensation by offering a company vehicle as offered by their competitors.
2. Use of Employee Vehicles Increases Liability Exposure
Some companies believe they eliminate liability 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 insurance coverage. But, in driver reimbursement, the company does avoid liability exposure if an incident occurs during personal use during off-business hours.
Ask yourself, what is your liability exposure if the employee postpones safety related repairs? What liability would a company face if an accident was caused by deferred maintenance? A company-provided vehicle allows you to control these variables and minimize this liability exposure.
If a company reimburses drivers, it would have to be sure the employee maintains a high enough insurance level. Even still, if an accident occurred, the employer would probably be brought into a lawsuit as well, no matter who carried the insurance.
3. 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 breakdowns, downtime, and unnecessary car-rental expense.
Also, since preventive maintenance is an immediate out-of-pocket expense, there is a temptation on the part of the employee to postpone routine maintenance, as well as more expensive mechanical repairs.
Depending on an employee’s financial wherewithal, some may find it difficult to pay for repairs out-of-pocket. If unable to pay, the vehicle may have to sit idle at a repair facility forcing the driver to either rent a vehicle (if they can) or wait for a check from the home office to get their vehicle out of the shop and back on the job.
In addition, a reimbursed driver will be required to spend an inordinate amount of time coordinating repairs, maintenance, rentals, and registration renewals, which could otherwise be devoted to selling.
In the event of an accident, with a company-provided fleet, drivers do not have to manage the repair of the vehicle and get a rental replacement vehicle, which is a tremendous productivity enhancement.
4. Reimbursement’s Negative Affect on Driver Morale
A company-provided vehicle helps create high employee morale. Drivers don’t have to worry about getting insurance, paying for unexpected major repairs, or routine maintenance. Employees perceive that the company values them more if it entrusts them with a company car.
On the other hand, driver reimbursement can negatively affect driver morale since some drivers will be overpaid while others underpaid, depending on the type of reimbursement program a company sets up.
Some reimbursement programs do not take into account mileage variability between employees. If the car allowance is provided to a low-mileage driver, then the employee is enjoying additional compensation. For high-mileage drivers, the car allowance may not be sufficient to cover the employee’s cost and may result in reduced performance by the employee because he or she feels cheated.
Different vehicle requirements, geography, and area economics require a very flexible reimbursement policy to cover these diversities or inequities will exist. Because of built-in inequities in a reimbursement program, some drivers may feel they are being made to subsidize the company’s operating costs.
With a company-provided vehicle, there are no inequities among drivers and no agitation for higher allowances. In addition, under driver reimbursement, employees will constantly agitate for higher allowances as cost-of-living prices escalate.
Employees also expect reimbursement for fuel or a cents-per-mile reimbursement with the car allowance. Depending on the amount of the car allowance, it could cost the company more than providing a company car.
Also, with a reimbursement program, the company cannot distinguish if fuel is purchased for personal use or only business use.
5. Wrong Company Image May be Projected
A company vehicle is part of the corporate image presented to the world. With driver reimbursement, whether a vehicle is appropriate to the type of image the company wants to project is determined by an employee.
On the other hand, a company-provided program allows the company to control the suitability and appearance of vehicles used for the business. When an employee provides the vehicle, the company surrenders this control. The wrong vehicle can send the wrong message to customers.
If the company doesn’t provide the vehicle, it has no control over what the employee drives to a customer location. Customer perception is everything, especially when it involves prospective customers. Also, employees may be required to entertain customers and you don’t want them to drive customers in an unsuitable vehicle. You need to control the image you project to both the public and customers.
Another problem 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.
Many companies decide against reimbursement because they want to present a professional, uniform presence in the marketplace. If a company uses a reimbursement plan, it cannot dictate what the employee purchases.
6. Costs 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 company 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.
Companies are eligible for discounted prices for initial vehicle cost, repair, parts, and service. Plus, on occasion, they can get out-of-warranty good-will adjustments. Also available are reduced rental car rates. As volume customers, they have direct access to manufacturers for assistance with parts expediting, and additional discounts.
An employee can’t possibly buy or lease a new car and operate it as inexpensively as a company. It would also be difficult to afford a retail lease with the average miles driven by fleet drivers. Most retail leases are structured for the person who drives from 12,000 to 15,000 miles per year. Even if a driver would choose to purchase the car, he or she would find out, after two to three years, that the resale value is so low, because of the high mileage, that they would be forced to keep driving that car or take a significant loss selling or trading it in.
No matter what cost category is examined, a company-provided program is less expensive than driver reimbursement. A well-run, company-provided fleet will generally reap the benefits of lower overall costs due to the economies of scale that larger volume drives. These include: lower acquisition costs, lower holding costs (lease or depreciation expense), lower maintenance expense (national account pricing, specially negotiated programs on tires, oil changes, etc.), lower fuel expense, and lower insurance costs.
7. 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.
Many fleets tend to equip all vehicles with current safety features. If employees are providing their own vehicle, they may not be willing to do the same. Fleets can provide, or mandate, additional safety equipment, such as barriers in minivans, to protect the driver and passengers from in-vehicle flying objects in the event of a sudden stop or collision.
Some companies also affix “How Am I Driving” bumper stickers with a 1-800 number to call as part of their fleet safety program. It would be difficult to require these bumper stickers be placed on a personal vehicle.
8. Company-Provided Fleet Can be Less Expensive
For the majority of companies, it is less expensive to provide a company vehicle program. Company vehicles are acquired at a cost far lower than the retail price an individual would pay for the same vehicle. Companies can take advantage of the manufacturer’s fleet incentives and allowances. Companies get excellent financing from lessors that is far better than what an individual could arrange on their own.
9. 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 numerous expense reports.
Also, professional fleet management will make better fleet-related choices than individual drivers. They can control lifecycle costs by calculating the most cost-effective replacement cycling of vehicles.
There are 10 other advantages provided by professional fleet management:
- Ensures correct vehicle specifications are selected.
- Expedites vehicle maintenance.
- Monitors and negotiates vehicle maintenance, parts availability, service work, and scheduling.
- Pursues accident reimbursement.
- Serves as liaison in lawsuits resulting from auto accidents.
- Audits and/or pursues warranty reimbursements.
- Audits and/or pursues manufacturer and lessor rebates.
- Responsible for keeping daily rental car rates to a minimum.
- Audits sale of used vehicles.
- Ensures fleet reporting is consistent and in compliance with applicable tax laws.
10. Loss of Competitive Allowance Program Monies
Oftentimes, manufacturer fleet incentive programs, such as competitive allowance programs (CAP), are structured based on reaching tiered volume purchasing levels. A reimbursement program, in which employees acquire their own vehicles, would eliminate a company’s fleet volume and eligibility for CAP monies. Many companies have grown to rely on these monies to assist in lowering their overhead expenses.
11. Driver May Carry Inadequate Insurance
If a vehicle is not provided by the company, then the company must be certain that the driver has sufficient insurance to protect it from exposure should there be an accident while the driver is on company time. It is difficult to confirm a reimbursed driver’s compliance with a company’s insurance requirements. Some insurance companies require drivers who use their own vehicles for business to carry a certain dollar level of insurance and it is an additional administrative expense to ensure compliance.
If a personal vehicle is used for part of his or her job, the employee needs to carry “business” insurance, which costs approximately twice as much as personal insurance. If the employee is involved in an accident and does not have “business” insurance on the vehicle, the carrier for the personal insurance can deny the claim on that person’s incurred loss because the driver had not advised the carrier he or she was using their personal vehicle for business.
When liability insurance premiums are paid by the company, 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.
Minimum established limits of liability should be established if personal vehicles are used. Someone internally must track this, as well as renewals. Also, the “business use” class of personal car insurance could increase the premium, as could annual miles.
Other coverage areas would include sufficient insured/underinsured coverage, rental reimbursement, and towing. Companies should also require such insurance to be obtained from financially solvent insurers. Plus, this would require an administrative expense and overhead to get evidence that the coverage has been actually purchased.
12. Reimbursement Still Requires Monitoring Employee MVRs
Company-provided vehicles offer a better opportunity to monitor driver behavior by a required annual DMV check. Even with a driver reimbursement program a company should still monitor MVRs. Otherwise, how would you know if someone is driving for a company without a valid license or with a DUI conviction?
No matter which vehicle provision is used, companies should make sure that drivers have acceptable MVRs as outlined by the underwriting departments of the carriers and those MVRs are updated at least yearly or more frequently.
13. Increased Temptation to Defraud the Company
Reimbursement opens the door for the padding of business mileages in order to increase allowances. Typically, drivers keep poor records of where they drove and for what reason, so companies often reimburse without actually knowing whether it was for business mileage. In the long run, it’s much easier to account for personal use (by tax implication or other method) than to make sure you are not paying a higher cents-per-mile rate for possible personal use. The cents-per-mile on reimbursement, which the IRS raises annually, can be higher than the cost-per-mile cost of having well-managed fleet vehicles.
Also, some employees may attempt to get reimbursed for unauthorized expenses and there may be a deception of the true operating costs. It takes time and labor to monitor against these abuses.
14. Employee Gets a 'Pay Cut'
The cost of gasoline, insurance, personal property tax, registration fees, and maintenance of vehicles vary substantially. It is rare that a company reimburses 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 to a reimbursement program: One of the biggest problems with driver reimbursement is establishing an equitable rate for everyone due to geographical areas, territory size, and types of driving.
15. Added Tax Burden for Drivers; Potential IRS Audit
If not handled correctly, reimbursement can be considered taxable income by the federal government and by some state tax authorities. Car allowances are taxable to the employee and the company is subject to its portion of FICA tax.
On average, the employee’s combined state and federal tax burden will increase, which amounts to a direct reduction in salary.
In addition, reimbursed employees may be subject to possible IRS audit since mileage expense is auditable.
16. Loans to Cash-Strapped Employees for Vehicle Repairs
Here’s a question to ask yourself: Will the reimbursement provided by a company to an employee driver be used for a vehicle or to make a college, mortgage, health, or home insurance payment?
Often, salespeople whose job requires their use of a vehicle 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 continue working. One fleet manager related a story about a driver whose transmission failed and the rep did not have the money for repairs or a replacement rental vehicle. The company loaned him the money to make the repair.
17. High-Mileage Drivers 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 lease, excess mileage charges can be expensive.
Replacement cars are needed sooner because they quickly accumulate high mileage, but negative equity prevents employees from doing so unless the company intervenes with special compensation assistance.
The extremely high mileage driven by employee drivers, an average of 20,000-30,000 miles per year, would preclude many from obtaining a personal closed-end lease.
18. Many Employees Buy 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.
If you allow employees to buy their own vehicles, some of them will buy the cheapest vehicle they can, so that they can try to make money from the company allowance. Also, drivers do not always replace vehicles on a timely basis.
19. Company Loses Dividends From 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 unpredictable, would be lost in reimbursement.
20. Eliminated Perk of Buying Used Company Vehicle
Employees may be interested in the benefit of buying their assigned vehicle when its useful life at the company is completed. This perk is eliminated when employees are reimbursed for their personal vehicle.
There is also the negative impact on employee morale due to the belief that a perceived fringe benefit has been eliminated. For example, many sales and service personnel consider the purchase of their used vehicles a fringe benefit.
21. Inability to Provide Proper Vehicles
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; however, in a reimbursement program a company loses control of this. With a company vehicle you are able to make vehicle modifications and enhancements to protect the driver and cargo.
Service vehicles often require specialized upfitting, which requires they be company-provided to maintain safety and weight standards.
22. Inability 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 maintenance.
A key question to ask is, how are you going to monitor the condition of that employee’s car? Is the motor oil being changed at manufacturer-recommended intervals, as it is done on fleet units? Are the tires in safe driving condition and properly inflated? What about the condition of the brake pads and rotors? Who will be monitoring this? How will repairs be handled?
23. Reimbursement Perceived as Part of Compensation
Often, a reimbursement allowance is seen by the employee as part of his or her personal income. When it is time to replace the current vehicle, the employee may resent the outlay of a large sum of money.
24. Inability to Regulate Personal Use of Employee Vehicles
With driver reimbursement, there is an inability to restrict who can drive a vehicle. For instance, with some industries, it is important to regulate who can drive the car (such as no one other than an employee and spouse) because, as is the case with pharmaceutical companies, some of these cars may contain drug samples.
25. Reluctance to Perform Certain Jobs
With a company-provided vehicle, you have greater assurance in knowing it will be used for company business rather than having a truck rented because an employee does not want to damage the inside of their own vehicle.
26. Issues With Policy Compliance
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. The administrative burden to monitor compliance would be excessive. What do you do if an employee is not complying with the rules for their personal vehicle?
In the final analysis, companies offering reimbursement end up with an inconsistent mix of fleet vehicles and fleet policies with mileage and financing terms that make it impossible to manage equitably.
27. No Transferring of Vehicles Between Employees
A company-provided vehicle fleet has the ability to transfer vehicles to other employees, which is lost in a reimbursement program.
28. On-Vehicle Advertising Missed Opportunities
Another reason companies frown on employees using their personal vehicles in their job is because of the inability to advertise the company on their personal vehicles.
29. Reimbursement of Deductibles for Non-Business Accidents
Currently, many fleets that offer company-provided vehicles 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 oversight would be required to ensure that the accident occurred during a business usage.
30. Some Regulations Prohibit Vehicle Use
Some businesses, such as pest control companies, are prohibited by EPA regulations to allow anyone to carry chemicals in their vehicle without the proper storage away from the passenger compartment. The same would be true with vehicles required to carry pharmaceutical samples.