Is your vehicle program driving you towards a lawsuit?
By Craig Powell
The food and beverage industry is part of a growing mobile workforce that is set to account for 72 percent of the total U.S. workforce by 2020. With this rise in mobile workers comes an influx of distributed sales and service personnel who supply, sell and deliver food and beverage products. While extra drivers alone are no cause for alarm, understanding how they should be reimbursed for business-related travel costs (like fuel, maintenance and insurance) – especially when using their own personal vehicle for work, has increasingly become an area of focus for employers.
Employers who fail to fairly and accurately reimburse drivers for these expenses can find themselves exposed to potentially costly lawsuits. These can reach into the millions of dollars when it comes to inaccurate reimbursements, lawyers’ fees and legal settlements. Starbucks, for example, recently settled a mileage reimbursement-related class action lawsuit, paying out $3 million for failing to reimburse 30,000 employees for mileage expenses incurred when using their personal vehicles on the job. Popular restaurant chain Jimmy John’s also experienced a lawsuit after 300 delivery drivers claimed they were made to pay for their own vehicle insurance, maintenance and work-related phone use – which was in violation of both the Fair Labor Standards Act and the Kansas Wage Payment Act.
Lawsuits like these illustrate how vitally important it is for companies to understand how to accurately reimburse their increasingly mobile workforces.
Debunking the IRS Mileage Rate Myth
When it comes to mileage reimbursement, there are a few options that food and beverage employers can choose from, including car allowances, cents-per-mile rates (including the IRS mileage rate) and fixed and variable rate programs. Many companies choose to reimburse their drivers using the IRS mileage rate, without truly understanding how it’s calculated and how the IRS intends for it to be used. The IRS mileage rate is not a recommended reimbursement rate, nor is it in line with the IRS’ recommended methodology for calculating fair and accurate reimbursements. Its main purpose is to serve as a base rate for individuals to calculate a tax deduction for their unreimbursed driving expenses.
The IRS mileage rate is a fixed, nationally averaged rate that is calculated once each year based on the previous year’s average costs of operating a vehicle. This means the rate is inherently inaccurate for reimbursing employees, as it 1) is not reflective of current prices and 2) is based on nationwide averages, rather than location-specific costs.
We can see the glaring issue with using the IRS mileage rate for reimbursement by taking a look at just one vehicle expense – fuel. Last year, the average fuel price in California was the highest of all 50 states, costing $3.23 per gallon at the pump. South Carolina had the lowest fuel prices of the year, averaging $2.18 per gallon. Companies that reimbursed based on the national average fuel price (which was $2.40 in 2015) under-reimbursed employees driving in California and over-reimbursed employees in South Carolina. If we take into account differences in other vehicle-related costs across the country, such as insurance rates or maintenance costs, this discrepancy becomes even greater.
To put it simply, the IRS mileage rate is meant for employees who do not drive often for business and need an easy way to calculate a tax deduction for unreimbursed driving expenses. It is not intended to represent the actual costs that individual employees incur when driving for business across different geographies.
The costs of gas, insurance, maintenance, license fees and other general vehicle expenses vary widely across the country, and so should vehicle reimbursement rates. The best way to ensure mobile workers are fairly and accurately reimbursed – and avoid costly lawsuits – is to use a fixed and variable rate (FAVR) program.
In addition to being the only reimbursement approach recommended by the IRS, it’s the only methodology that that can be used to reimburse drivers tax-free for both the fixed and variable costs associated with driving for business. Fixed costs (e.g., insurance, taxes, depreciation) are calculated for each driver based on where they live, while variable costs (e.g., gas, maintenance, tires) are based on the miles they drive and current prices in an employee’s driving territory. Taking unique fixed and variable costs into consideration makes FAVR the only approach that allows employers to calculate reimbursement rates that most accurately reflect the driving costs each employee incurs.
With the rise in today’s mobile workforce and a number of technologies available to streamline the administration of FAVR programs, the time has come for food and beverage employers to take a hard look at their reimbursement practices. By reimbursing the right amount, employers can eliminate over and under-reimbursements – providing cost savings and mitigating legal risk. Most important, they can ensure all employees are treated fairly.
Craig Powell is the president and CEO of Motus, the most accurate vehicle management and reimbursement platform available. When not leading the charge toward the future of mobile workforce management, Powell sits on the board of the charitable organizations Your Grateful Nation and Beat the Streets. He can be reached at firstname.lastname@example.org.