Properly compensating employees for their personal use of vehicles is crucial for many businesses. However, navigating this area can be quite challenging due to changing rules that vary by country and state. In this article, we will delve into California Labor Code Section 2802 and explore how businesses operating in California can ensure they accurately track mileage and reimburse their employees.
California Labor Code Section 2802 pertains to the responsibility of employers in the state to reimburse employees for expenses they incur while carrying out their work duties. Although these reimbursements can cover various expenses, this article will focus on vehicle reimbursements. This article will help you understand how employees can be fairly compensated under 2802. The key areas we will cover include:
- What is California Labor Code Section 2802
- How it relates to vehicle reimbursements
- How to properly provide reimbursements
- Employer obligations
Overview of California Labor Code Section 2802
To start, we are going to take a closer look at California Labor Code Section 2802. It states that “An employer shall indemnify his or her employee for all necessary expenditures or losses incurred by the employee in direct consequence of the discharge of his or her duties.” Put in simpler terms, employers must cover the costs of employment-related expenses that employees take on while performing their job, such as:
- Costs associated with working from home
- Personal vehicle usage at work
Importantly, the code also covers the penalties if an employer does not comply. These may include interest on the owing amount and attorney fees for the employee. Therefore, it is vital to understand this section of the labor code and its implications for your business.
Vehicle Reimbursements under Section 2802
As noted, there are a number of different cases where Labor Code Section 2802 could apply, but we are going to focus on personal vehicle usage at work. Both employers and employees need to understand the scope of this law so that both parties can mutually benefit, such as in the case of an employee using their personal vehicle for duties at work. It is an increasingly common situation for workers to use personal vehicles to perform duties such as driving between jobs sites and making deliveries, and while this can have numerous benefits for the company and worker, proper compensation is the key to the productive use of this system.
How to Provide Vehicle Reimbursements that Abide by 2802
In the state of California some important steps could be taken so that your vehicle reimbursements fall in line with the rules laid out in Section 2802 of the Labor Code.
a) Get a mileage tracker:
The first step is to start using a mileage tracker. To properly reimburse your employees, or for your employer to properly reimburse you, you are going to need accurate data. Cardata provides an easy-to-use app that allows drivers to track their trips with one press of a button, ensuring that all work-related vehicle usage is properly tracked and recorded, making reimbursement quick and simple.
Another option is to use a mileage tracking spreadsheet, although these are less accurate and more time-consuming. However, here’s a mileage log spreadsheet that you are free to use to get started.
b) Use an IRS-approved vehicle reimbursement program:
Next, you can use an IRS-approved vehicle reimbursement program, and there are several options available that have different benefits depending on your exact circumstances.
i. Fixed and Variable Rate (FAVR)
FAVR, or fixed and variable rate, means that a portion of the reimbursement covers fixed costs, such as insurance, and others as variable, like fuel. This has many benefits, including saving time and money for both the driver and the company.
ii. Tax-Free Car Allowance (TFCA)
Alternatively, you may want to look into a Tax-Free Car Allowance plan. Like FAVR, a TFCA offers great tax benefits but may be better for reimbursing vehicles in some cases, like:
- You want to operate without FAVR compliance measures.
- TFCA has a simpler method for calculating taxability, so you don’t need to check everything you do on FAVR.
- Your team is fewer than five people or they drive fewer than 5,000 miles per year.
- These are compliance measures for FAVR without which you might want to pick TFCA.
- You don’t want to check insurance.
- TFCA does not require you to check driver insurance, unlike FAVR. However, Cardata’s compliance team is available to help you check insurance, even on TFCA! Such a practice encourages safety.
iii. Cents Per Mile (CPM)
Another option is Cents per Mile, which uses the IRS optional rate of 65.5 cents per mile driven, or anything up to that rate, and is also tax-free. This is not as accurate or personalized as FAVR but can work well if your employees only occasionally use personal vehicles for work.
All of these programs have benefits and challenges, so be sure to book a demo with Cardata today to see how these IRS-approved programs can be part of a tailored vehicle reimbursement policy for your business.
Types of Vehicle Expenses Eligible for Reimbursement
Car ownership and use come with a variety of expenses, and it’s important to understand all the costs associated with personal vehicle usage. Here we will break down some of the most common expenses that may need to be reimbursed under Section 2802.
a) Fuel costs:
The most obvious and immediate expense is fuel. This is a day-to-day out-of-pocket expense for employees, so ensuring they are promptly and accurately reimbursed will help your business run smoothly.
b) Maintenance and repairs:
Less obvious is maintenance. Since employees are likely to use their vehicles outside of work, it might be necessary to determine a percentage of time used at work and cover a portion of maintenance costs this way.
c) Insurance and registration fees:
If there are any specific insurance and registration fees that the employee is required to have to use their vehicle at work, then under Section 2082, the employer is required to pay them.
Depreciation refers to a vehicle’s value dropping due to age and mileage. Like maintenance, vehicle depreciation is a somewhat hidden expense and can be more difficult to calculate than fuel. However, properly documenting mileage can assist in determining a set-rate reimbursement amount that can be agreed on by employer and employee to offset the cost of vehicle depreciation due to work-related usage.
Under Section 2082 in California, employers have essential obligations to fulfill when employees use personal vehicles for work.
a) Providing reimbursement:
First and foremost, employers must reimburse employees for work-related expenses. As previously mentioned, this extends beyond vehicle reimbursements and includes things such as work-from-home expenses, and these reimbursements must be made promptly and without unnecessary limits. In fact, even if an employee has not submitted a request for reimbursement, the employer must pay it.
b) Reasonable reimbursement:
The reimbursements given must be in accordance with the costs taken on by the employee. As noted in the previous section, many different costs come into play when an employee uses their personal vehicle, and this is why it is essential to use an IRS-approved reimbursement program that is tailored to your needs, such as FAVR or a TFCA.
Proper documentation on the part of the employer and employee is needed for all reimbursements. Employers may require that workers track their work-related expenses, such as uniforms and work-from-home expenses, and submit them for approval. In the case of personal vehicle usage, this can become even more complicated, as we have already discussed the large number of possible expenses, such as fuel and maintenance.
Exceptions and Limitations
Not all personal vehicle usage will be covered by Section 2802. In certain situations, such as the use of a company vehicle, no reimbursement is needed. Additionally, usage outside of work, including commute times, is not included as a work expense and is therefore not covered by Section 2802. It is important to always seek legal counsel to ensure your company’s reimbursement policy aligns with Section 2802.
California Labor Code Section 2802 is a key part of the Labor Code for any employer to understand and implement. It lays out the rules regarding compensating employees for costs at work and covers a wide variety of situations. For our purposes, it covers vehicle reimbursements for employees using personal vehicles while at work. The important takeaways are to carefully collect data on trips and mileage, which can be easily done in our app, and use an IRS-compliant program for reimbursements.
Disclaimer: Nothing in this blog post is legal, accounting, or insurance advice. Consult your lawyer, accountant, or insurance agent, and do not rely on the information contained herein for any business or personal financial or legal decision-making. While we strive to be as reliable as possible, we are neither lawyers nor accountants nor agents. For several citations of IRS publications on which we base our blog content ideas, please always consult this article: https://www.cardata.co/blog/irs-rules-for-mileage-reimbursements. For Cardata’s terms of service, go here: https://www.cardata.co/terms.