California Car Allowance Rules: Ensuring Compliance

Introduction

While a majority of states do not set their own requirements concerning car allowances for employees, California is not among them. The famously regulation-friendly state has enshrined the right to a car allowance (or equivalent) in its labor code.

Surprisingly, the greater protections afforded to workers don’t seem to impact the state’s economy negatively: if California were its own country, it would rank fifth place worldwide on gross economic output, just behind Germany and ahead of India.[1]

Navigating the regulations surrounding car allowances can be complex. This article will explore 2802 of California’s state Labor Code, and how these car allowance rules affect businesses operating within the state.

We’ll also discuss how employers can provide fair and compliant vehicle reimbursements and the types of vehicle expenses eligible for reimbursement.

If you’re doing business in the Golden State, here’s everything you need to know to stay in the state’s good books when it comes to car allowances.

Overview of California Labor Code Section 2802

 The legislation that covers car allowances in California is Section 2802 of the state’s Labor Code.

This piece of legislation 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.”[2]

Note that this is not a very long piece of legislation, and its definition is kept deliberately broad in order to reduce loopholes and offer workers the maximum amount of protection under the state’s law.

Basically, any time one of your workers incurs a cost of any sort to fulfill their work obligations, you, the employer, are on the hook.

This broad definition thus covers all sorts of expenses, such as uniforms, training, costs related to working from home, and, most importantly, the use of a personal vehicle for work purposes.

Failure to comply with this code can lead to penalties, including interest on unpaid reimbursements and attorney fees for the employee. So it’s better to head off any problems and think proactively by setting up a defined car allowance program rather than have a civil judgment create one for you.

Vehicle Reimbursements under Section 2802

 You may be wondering if California’s section 2802 has any specific language or rules concerning car allowances or vehicle reimbursements.

The answer is: no, it does not.

But since it does mandate that all expenses incurred by employees be indemnified by their bosses, it’s essential to either reimburse employees for their actual costs of driving for work purposes or to set up some sort of structured car allowance program that accounts for all these possible expenses.

If employees use their personal vehicles for work-related travel and no company vehicle is provided, employers must reimburse them for the expenses associated with using their cars for business purposes. This includes fuel costs, maintenance and repairs, insurance, registration fees, and even vehicle depreciation.

Luckily, there are a few different types of car allowances for employers and fleet managers to choose from that do cover these expenses. We’ll explore them below.

Types of Vehicle Expenses Eligible for Reimbursement

Since Section 2802 stipulates that all employee expenses must be indemnified, here are the vehicle expenses that your car allowance program should address.

1.  Fuel costs: Employers should promptly reimburse employees for their fuel expenses, as this is an out-of-pocket cost incurred during work-related travel. Requiring your employees to keep regular logs of trips made for business purposes, including mileage and odometer readings makes this aspect of reimbursement easier. California has a higher cost of living and average fuel cost than some of the Gulf states, and you can expect this to be reflected in a higher-than-average car allowance or mileage reimbursement.

2. Maintenance and repairs: Since personal vehicles are used for both work and personal purposes, it may be necessary to determine the percentage of time the vehicle is used for work and cover a portion of maintenance and repair costs accordingly. Brakes, steering mechanisms, and transmissions will all break down over time with enough use, and employees should track all their maintenance costs for the year, and then determine how many hours in an average week their car was used for work.

3. Insurance and registration fees: Employers must reimburse employees for specific insurance and registration fees required for using their personal vehicles for work-related purposes. Since personal automotive insurance rates can vary wildly, it’s important for employers to factor in these costs when designing a car allowance program.

4. Depreciation: Employers should take into account the depreciation of the vehicle due to work-related usage and provide appropriate reimbursement to offset this cost. Plus, the Internal Revenue Service agrees; their Publication 463[3] includes depreciation schedules that calculate how much a vehicle depreciates per year based on the average cost and the year of purchase — and how to factor these costs into a car allowance program.

Car Allowance Programs and Compliance with California Law

The good news for employers is that Section 2802 is so broad in what it covers, but equally vague when it comes to what kind of car allowance or mileage reimbursement program you offer. So long as all the expenses are getting indemnified, it doesn’t really matter how the reimbursement is structured — this means flexibility in program design for employers.

Here are four options for employers and fleet managers looking to design a car allowance program that complies with California’s rules:

1. Lump sum payment

A lump-sum payment for vehicle costs is often called a vehicle stipend or car allowance and is usually listed as a defined benefit in a job listing or employment contract. Because this is considered a payment for services performed, it falls under the IRS’s definition of a “taxable fringe benefit,” and therefore is taxed as though it is income.

This is the simplest form of car allowance, but also the least efficient, as it could push employees into a higher tax bracket, and therefore they have more of their take-home pay taxed than they would with another type of program.

Moreover, since an average of 30% of a car allowance is lost to tax waste, it is possible that this kind of taxable allowance program would not reimburse for all expenses and therefore not be compliant with California law.*

*YMMV: you must consult an attorney to definitively resolve this question.

2. Flat rate mileage reimbursement

California permits employers to offer a flat rate reimbursement, which includes a Cents per Mile rate.

Cents per mile programs are simple to administer and are tax-free up to a certain amount (usually whatever the IRS standard cents per mile rate is for the year.)

In order to stay compliant with both state and federal law, your employees must track their mileage and keep adequate documentary evidence of the business trips they make, and you as an employer must check these every quarter.

However, since Section 2802 does specify that all employee costs must be covered, you’ll want to spend some extra time checking the numbers to ensure this rate meets or exceeds your employee’s actual costs, or you could be exposed to a labor code judgment.

3. Structured reimbursement program like FAVR

FAVR programs are the hardest and most complex to administer but tend to provide big economic benefits to employers who bother to jump through all the regulatory hoops.

Since FAVR programs provide a mix of fixed-rate payments (like a typical allowance) to cover fixed expenses, plus a variable payment (like the Cents per Mile rate, above) to account for variable expenses of driving, it tends to be the most equitable and precise car allowance method.

Since you are performing FAVR rate calculations ahead of time to determine the vehicle reimbursement values, this program is likely to comply with California law.

4. Tracking and reimbursing actual expenses

Having your employees document every single gas purchase, insurance payment, and maintenance bill — for every trip — could be a compliant method for car allowance payments.

Firstly, since you are paying your drivers only for what they actually spend (and document), this method will always satisfy Section 2802’s provision for indemnification of all on-the-job expenses.

However, anyone who has managed a team of five or more employees knows how difficult it can be to ensure everyone has their reports in on a timely and regular basis. Tracking and repaying actual costs is probably the ‘safest’ car allowance method in terms of compliance with California’s labor rules, but it also is the most time-consuming of any of the four methods listed here. Besides, FAVR and Accountable Allowance programs already have built in actual costs calculations, making them more than likely compliant with the law, without all the hassle.

Conclusion

Complying with California Labor Code Section 2802 is crucial for employers when providing vehicle reimbursements to their employees. By implementing IRS-approved reimbursement programs, keeping accurate records, and providing fair and reasonable reimbursements, employers can ensure compliance and foster a productive and fair work environment.

Staying informed about the requirements under Section 2802 helps businesses avoid legal complications and penalties, as well as demonstrates their commitment to doing right by their workers from Joshua Tree to the Inland Empire.

If you’d like to learn more about why a FAVR program might be the best car allowance program for your workers in California, speak to an expert today.

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 or 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.

[1] Economy of California – Wikipedia 

[2] Labor Code 2802 

[3] About Publication 463, Travel, Gift, and Car Expenses | Internal Revenue Service