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4 Hidden Costs of Driver Reimbursement

Tips and Advice Posted by Bob Belanger, Regional Sales Manager on November 24, 2014

When it comes to company vehicle programs there are a few options available to you. In addition to owning or leasing your fleet of vehicles, you could consider fuel reimbursement. Fuel reimbursement is when employees use their personal cars and are compensated for their mileage.

When it comes to fuel reimbursement plans, there are many hidden expenses which must be calculated and considered as part of a lifecycle cost of a vehicle.

1. Fleet Maintenance and Safety 

Driver_Safety

Unlike with a company-owned or leased fleet of vehicles, with an employee-owned fleet of vehicles it is virtually impossible to ensure that every vehicle is properly maintained. This has major safety implications and often companies will find themselves liable for accidents caused by deferred maintenance. Since maintenance is an out of pocket expense for the employee, and because some fuel reimbursement programs are not sufficient to cover vehicle expenses, a reimbursement program may actually increase the likelihood that employees will defer maintenance, leading to unsafe driving conditions.

A fuel reimbursement program also means a lack of control over the vehicles. There is nothing to necessarily stop employees from pocketing maintenance stipends and forgoing things like oil and tire changes. Also, employees may own cars that are substandard in terms of safety, leading to more safety issues on the road. If an improperly maintained personal vehicle experiences a breakdown, it can prevent an employee from performing their job. With a company-provided vehicle you have control of the make, model, maintenance, and safety features. You can also be sure that all vehicles are properly insured.

2. Manufacturer Lease Incentives

Cost_of_Vehicle

There are lost opportunities when using a reimbursement program, some of which directly affect your bottom line.

Manufacturer incentives and fleet allowance programs can significantly lower a vehicle’s capitalized cost. This allows companies to maximize savings. Of course if you choose to use employee-owned vehicles, you will not benefit from utilizing this lower cost opportunity.

With a fuel reimbursement plan you also lose the full menu services of a fleet/lease management company. Many company-provided fleets can be managed with one payment to a leasing company. This saves time and money spent on expense reporting and other administrative processes. Another source of revenue comes from the resale of vehicles. Although this source is unpredictable, a fleet management company can ensure that you are reselling your vehicle at the right time, for the greatest return on your investment.

3. Lost Tax Breaks

Taxes are another area that may be challenging if choosing to use a fuel-reimbursement plan. For example, reimbursement checks are considered taxable income, so a driver receiving a reimbursement check of $100 may only get $75 after the check is taxed. This not only costs you money, it also makes reimbursement checks appear smaller to your employees.

There is also an increased risk of audit from the IRS. This is another area where you lose control because the burden of substantiating business expenses falls to the employee and some drivers keep poor records.

Finally, poor record keeping goes along with exaggerated business mileage. If an employee feels that they are not being reimbursed fairly, they may exaggerate business miles to recoup some of their money. In addition, it can be very difficult to keep track of exact mileage when your employees are using their car for both business and personal uses. It is not uncommon for reported mileage to decrease when moving away from a fuel reimbursement program. 

4. HR Implications Human_Rescources

company car projects a professional image not only to potential customers but to potential employees. Industry surveys have shown that prospective employees view company-provided vehicles as equivalent to health care coverage and personal benefits. Fuel reimbursement programs, on the other hand, do not project the same professionalism, cost the employee more for out of pocket repairs, and end up costing the business more overall. Providing employees with a company vehicle can assist with employee recruiting efforts and improve talent retention.

Providing company vehicles also boosts employee morale. They don’t have to worry about insurance, and reparative/routine maintenance, taking the hassle out of using the vehicle. Also when employees do not have the money needed to repair a vehicle despite their reimbursement, a company will often have to provide a loan to repair the vehicle and keep the employee on the road. This ties up money in loans and repairs, and may harbor resentment from the employee as they try to pay back their loan.

There are situations where driver reimbursement programs might work for your company, but overall there are many hidden expenses and unforeseen pitfalls when trying to manage a reimbursement program. Even if the surface level expenses of these programs appear lower, it’s better to look into whether leasing or owning will work better for your company.

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