Auto Insurance: Can Employers Reimburse?

Employers may feel relieved that their employees are using personal cars for work purposes, assuming that their auto insurance will cover any damages or injuries resulting from an accident. However, this isn't always the case, and businesses can sometimes be held liable for damages if an employee causes an accident while using their personal car for work. This is known as vicarious liability. In such cases, employers may choose to assist or fully reimburse employees for any damages to their vehicles or insurance deductibles. To avoid confusion, it is essential to have a clear corporate policy regarding the use of personal vehicles for work and the associated reimbursement guidelines.

Employers can be held liable for damages if an employee causes an accident while using their personal car for work purposes

Vicarious liability can apply when an employee is driving a company car or their own personal vehicle for work-related tasks, such as making sales calls, visiting clients, running business errands, or completing a task at the employer's request. If the employee is simply commuting to and from work, this is generally not considered a work-related purpose, unless they are driving to and from a job site other than the employer's usual place of business.

In the event of an accident, the employer may be held liable for injuries and property damage caused by the employee. This is especially relevant if the employee's auto insurance coverage is insufficient to cover the total cost of the damages. Employers can protect themselves by setting minimum required car insurance coverage for employees who use their personal vehicles for work and regularly verifying their employees' auto insurance policies.

Additionally, employers can be held liable for negligent hiring, retention, or lending of a vehicle. For example, if an employer hires a delivery driver with a history of reckless driving and an accident occurs, the employer may be deemed negligent. To reduce liability, employers should conduct thorough background checks, enforce vehicle policies, and ensure adequate insurance coverage for company vehicles.

Employers can require employees to carry a specific amount of auto insurance coverage on their personal vehicles

Motor vehicle accidents cause 39% of occupational fatalities, with over 2,000 employees killed annually. In 2019, motor vehicle accidents cost employers $72.2 billion in the US alone. As an employer, you are responsible for protecting your employees and your company. If an employee causes an accident during the workday and their auto insurance cannot cover the costs of injuries and property damage, the employer can be held liable for the difference. This is called vicarious liability.

To guard against underinsured employees, employers should set a minimum required car insurance level for all employees who drive during the workday. The recommended minimum coverage is 100/300/50, with the best practice being a 250/500/100 policy. Employers can require employees to carry higher insurance coverage on personal vehicles, but the employer should pay for the upgrade by incorporating the higher insurance premium into the employee car allowance or vehicle reimbursement.

It is also important to verify employees' auto insurance coverage every six months, as a minimum auto insurance requirement is meaningless if the employee does not adhere to it or lets their insurance lapse. Most policies renew every six months, so this is a good time to check up on their coverage. While it may feel like micromanaging to require proof of an employee's auto insurance, if employees are driving personal vehicles as part of their job, they have implicitly agreed to allow the company some oversight of that vehicle.

By requiring employees to maintain sufficient auto insurance and verifying their compliance, employers can protect both the company and their employees.

Employers can reimburse employees for the use of a personal vehicle with a mileage rate

There is no federal law requiring employers to reimburse employees for mileage when they use their personal vehicles for company purposes. However, employers are federally required to reimburse employees for any work-related expense to a point. If an employer fails to reimburse an employee, and this causes the employee's net pay to fall below the federal minimum, the employer could face lawsuits and legal penalties.

Certain states, including California, Illinois, and Massachusetts, do mandate that employers reimburse employees for mileage and vehicle expenses related to work. It is important to check the laws in your state and consult with a legal professional to determine whether you are required to provide mileage reimbursement.

Even if it is not a requirement, it may be a good idea to reimburse employees for mileage if they do a lot of driving for work. Mileage reimbursements can be tax-deductible and are not considered income, so they are non-taxable for employees. However, if an employer reimburses an employee beyond the true expense of driving for work, a portion of the reimbursement could be considered compensation and would be subject to taxation.

There are a few different ways to structure a mileage reimbursement. One way is to use a flat rate per business mile driven, such as the IRS standard mileage rate. The IRS rate covers the costs of owning (fixed costs) and driving (variable costs) a vehicle for business. The IRS standard mileage rate for 2024 is $0.67 per mile. If an employer reimburses employees at a rate that is the same as or lower than the IRS standard, the reimbursement is tax-free if the employee complies with IRS rules for accountable plans.

Another approach is to use a fixed and variable rate (FAVR) reimbursement. With this method, employers pay a fixed amount to cover fixed costs such as insurance, lease or depreciation, taxes, and registration. They then pay a cents-per-mile rate to cover variable costs such as gas, maintenance, and oil. The FAVR method can be more equitable as it is based on a standard vehicle rather than a standard mileage rate, and it takes regional variations in costs into account.

To ensure that a reimbursement is tax-free, it must meet the three rules of an accountable plan as set by the IRS:

• The expenses must have a business connection.
• The employee must adequately account for these expenses to the employer within a reasonable period.
• Any excess reimbursement or allowance must be returned within a reasonable period.

Employers may be required to reimburse employees for business-related driving expenses to satisfy the federal Fair Labor Standards Act's (FLSA) minimum wage and overtime requirements

Employers may be required to reimburse employees for business-related driving expenses to satisfy the federal Fair Labor Standards Act (FLSA) minimum wage and overtime requirements. The FLSA establishes minimum wage, overtime pay, recordkeeping, and child labour standards for full-time and part-time workers in the private sector and in federal, state, and local governments. While the FLSA does not require employers to reimburse employees for all work-related expenses, it does mandate that covered, non-exempt employees receive overtime pay for hours worked over 40 per workweek at a rate of not less than one-and-a-half times their regular rate of pay. This includes time spent driving for work-related activities.

When employees use their personal vehicles for work, they are putting a valuable asset at risk to benefit the company. Therefore, a company vehicle reimbursement plan should cover more than just fuel, oil changes, maintenance, and tires. It should also include the costs of vehicle ownership, such as insurance, taxes, registration, and even depreciation. Car insurance and depreciation alone can account for around 60% of the annual costs of owning and operating a vehicle.

A standard mileage reimbursement, such as the IRS business mileage rate, may not adequately cover these fixed vehicle expenses. This is because the reimbursement amount depends on the number of miles driven, which can vary significantly between employees. A low-mileage driver might be under-reimbursed, while a high-mileage driver might be over-reimbursed.

To ensure employees are properly reimbursed for business-related driving expenses, employers can consider a fixed and variable rate reimbursement approach, also known as FAVR. This involves paying a fixed monthly stipend for predictable expenses like depreciation, insurance, taxes, and registration, and a smaller mileage reimbursement rate for expenses tied directly to business mileage. This way, employees' reimbursement amounts are always aligned with their expenses, regardless of how many miles they drive.

By adequately reimbursing employees for business-related driving expenses, employers can avoid potential legal issues and ensure they are complying with the FLSA minimum wage and overtime requirements.

Employers can use the IRS standard mileage rate to compute the deductible costs of operating an automobile for business use

When employees use their personal vehicles for work, they are putting a valuable asset at risk to benefit the company. Therefore, a company vehicle reimbursement plan should cover more than just the obvious expenses like gas, oil changes, maintenance, and tires. The costs of vehicle ownership like insurance, taxes, registration, and even depreciation should be reimbursed as well.

In the United States, the Internal Revenue Service (IRS) issues standard mileage rates that can be used to calculate the deductible costs of operating an automobile for business, charitable, medical, or moving purposes. These rates are updated annually and are based on a study of the fixed and variable costs of operating a vehicle. For 2023, the standard mileage rate for business use is 65.5 cents per mile, up 3 cents from the mid-year increase in 2022. This rate applies to electric, hybrid-electric, gasoline, and diesel-powered vehicles.

However, it is important to note that the standard mileage rate may not always fully cover all vehicle-related expenses. Some employees who drive fewer miles per month may find that the reimbursement is not sufficient to cover their total vehicle costs. In such cases, a fixed monthly stipend for predictable expenses like depreciation, insurance, taxes, and registration, along with a smaller mileage reimbursement rate for business mileage, may be a more equitable solution. This approach, known as the fixed and variable rate reimbursement or FAVR, ensures that employees are reimbursed based on a standard vehicle rather than a standard mileage rate.

By adopting the FAVR approach, employers can provide fair and adequate reimbursement for their employees' vehicle expenses. This not only protects the employees but also safeguards the company from potential risks associated with underinsured employees.

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