There are a number of “hidden” costs to offering employees the personal use of a company vehicles. For instance, personal use negatively impacts the resale value of a vehicles. On average, personal use accounts for 15-18% of the overall miles accumulated during a vehicle’s service life. Each personal mile driven not only reduces a vehicle’s residual value, but also shortens its service life by causing it to reach its optimal mileage replacement earlier. If 15-18% of a fleet vehicle’s mileage is personal use, the life of “wear” items, such as tires and brakes, are correspondingly shortened, requiring replacement earlier than normal.
A fleet manager needs to know what it costs the company to provide personal use, not just the employee taxable benefit, but the total cost to the company. This involves not only all direct, but also indirect costs to offer this benefit. This includes the cost of fuel, maintenance, increased wear-and-tear, and program administration, along with insurance and risk exposure. A fleet manager must quantify the cost of each of these variables and calculate the total cents-per-mile cost by each vehicle type in the fleet. Once you have accomplished this, an accurate estimate for the cost of personal use can be determined by multiplying this cents-per-mile cost by the average personal miles driven by employees.
Indirect Cost to Administer Personal Use
Most agree that some drivers fudge their personal-use mileage, but no one knows by how much. There is a long-standing suspicion that personal-use mileage is far greater — perhaps substantially greater — than what the industry accepts as the conventional norm. For example, when fleets switch over to a system that automatically measures a vehicle’s commute, personal, and business miles, the number of personal and commute miles almost always dramatically increase. There is an administrative cost to provide personal use as an employee benefit, with internal costs ranging from $50-$90 per year per vehicle, depending on how the process is managed.
The IRS requires every business to measure and report as income the extent of an employee’s compensation associated with the personal use of a company-provided vehicle, including the value of company-paid fuel. The process of calculating personal use taxable benefits is an end-of-the-year administrative headache. For instance, companies must monitor driver submission of personal use reports. For drivers who fail to submit a report, monthly notices must be sent as a reminder. Similarly, driver statements of personal use mileage must be periodically audited to ensure compliance and that drivers are keeping accurate business records of miles driven. Many drivers are very meticulous about reporting personal use. However, the 80/20 rule applies to personal use administration. Every fleet manager has stories of drivers who simply can’t or won’t report personal use mileage on a regular or timely basis, despite numerous attempts (and threats) to get them to comply. Chasing after these “scofflaws” is extremely time-consuming and aggravating, diverting company personnel from their other responsibilities representing a substantial soft cost. Anyone administering a personal use taxable benefit program will tell you it requires significant administration. This is an indirect cost that is often not factored into personal use chargeback calculations.
Using Company Property to Moonlighting Tool
Most personal use problems revolve around non-compliance, but some unscrupulous employees to use their company vehicles as a tool to generate supplemental personal income for themselves. This is not a new phenomenon, but, anecdotally, there appears to be a recent uptick in this activity. Fleet managers say some employees use company vehicles to moonlight for a second job, such as working as a DoorDash or Grubhub driver. Other moonlighting activities include pizza delivery by children of employees, who, as a family member, are authorized to drive it. Likewise, service technicians have been known to use company vans to moonlight for their personal businesses. One example are employees working in landscaping, plumbing, or home improvement, who strike a personal deal with the customers after a job estimate was rejected because of price. These unscrupulous employees will offer to do the job at a lower price, on their personal time, often using corporate assets, such as the company vehicle and the tools it carries. These incidents should raise all kinds of red flags, such as the heightened risk of vicarious liability or negligent entrustment exposure, not to mention the negative impact on brand image, along with unnecessary wear and tear to a vehicle and reduced resale value due to higher mileage.
Expansion of Work-from-Home Business Model
As the economy emerges into a post-pandemic period, it is expected that many businesses will continue the work-from-home business model. Often, employees working from home offices report very little personal miles, arguing that the majority of vehicle use is from their “office” to a customer, a job site, or other business location. Personal use for employees who work from their homes is complicated because of the confusion over whether the first and last trip of the day is considered a business use trip or personal use. Unless a home is the “primary place of business,” the first trip of the day is going to work, not leaving work. For a typical sales rep, the primary place of business is really the client’s office. Therefore the first and last business trips are considered personal use.
While personal use is an employee perk, senior management needs to know that there are hidden cost associated with the benefit.
