If you’ve never heard of fixed and variable rate (FAVR) reimbursement, or you’re not entirely sure what it is, you’re not alone. While FAVR has been around for awhile, it isn’t as common as other mileage reimbursement options. So what is FAVR? How is it different from mileage reimbursement? We’ll tell you all that and more in this blog where we pit FAVR vs Mileage reimbursement and let you know who comes out on top.
Before we get into what FAVR is, we’re going to start with mileage reimbursement. If you don’t work in a driving role at your company or you’re not involved with compensation or operations, you might not know more than context clues. Mileage reimbursement is more or less a blanket term for how companies pay their employees for driving personal vehicles.
To get scientific, you can think about it in taxonomy terms. Vehicle programs would be the broadest form of classification. One step below would be the separation between mileage reimbursement (vehicle programs that reimburse employees for the business use of personal vehicles) and company-provided (vehicle programs that give driving employees a fleet vehicle). The vehicle programs that mileage reimbursement typically refer to are: car allowance, cents-per-mile (CPM), and fixed and variable rate (FAVR).
Wait, FAVR is a form of mileage reimbursement? Yep. And it doesn’t have to get more confusing than this. Fixed and Variable Rate reimbursement is a type of mileage reimbursement, but most people aren’t thinking of FAVR when they hear mileage reimbursement. More often than not, when people hear or use the term “mileage reimbursement” they’re referring to a cents-per-mile reimbursement.
If FAVR is a form of mileage reimbursement, why compare the two? Well, FAVR is unlike any other form of mileage reimbursement. Companies using a fixed and variable rate reimbursement program reimburse employees for both the fixed costs and variable costs of vehicle operation. What does that mean? Well, there are two different types of costs associated with vehicle ownership.
Fixed costs include the cost of vehicle registration and insurance. These costs don’t do a whole lot of changing, so they typically remain static. Variable costs include the cost of gas, maintenance, wear and tear on tires. Because those costs are impacted by the amount of usage, the area the employee drives in and market factors they see a lot of fluctuation. To provide the most accurate reimbursement, these costs are specific to each individual driving employee.
Earlier we talked about FAVR being a form of mileage reimbursement. So why compare the two? What’s the difference? Believe it or not, there are quite a few, and we’re about to get into them, but first, a quick note. Vehicle programs are rarely one-size-fits-all. Bigger companies will often have different programs for different driving employee pools. A large business services company may provide their sales reps with a cents-per-mile reimbursement while their on-site technicians drive fleet vehicles. Now, with that out of the way, here’s the matchup: FAVR vs Mileage reimbursement.
Fixed and variable rate (FAVR) reimbursement easily wins here. As stated before, rates are calculated to the geographic location of each employee. Mileage reimbursements on the other hand, whether CPM or a car allowance, are typically broad averages. They provide employees with an amount that should cover the expenses of driving for work, but may fall short or possibly go far beyond.
To be clear, there is a place for mileage reimbursement. This is typically a smaller company or pool of drivers that operate in a tight region and drive no more than 5,000 miles a year. In this situation, the specificity of a FAVR program is matched by the operating area and size of the mobile workforce.
Again, this is where fixed and variable rate (FAVR) reimbursement shines. Come sky high gas prices or economic downturn, companies can adjust their rates to meet the needs of the business and its employees. This isn’t as easy for companies with a typical mileage reimbursement. Many resort to pairing their car allowance with a fuel card, or providing CPM drivers with a temporary allowance. Both of those options can get messy quickly.
One of the big reasons companies look for new vehicle programs is tax waste and audit liability. When improperly executed, mileage reimbursement programs can expose the company to both unnecessary tax waste and audit. With the right vendor, a FAVR program delivers IRS-compliant mileage logs and tax-free reimbursements. A win for all involved.
One reason a lot of companies haven’t heard of or given FAVR much thought is FAVR is an outsourced vehicle program. Even operating in a small area, businesses would have a hard time configuring accurate rates for their employees. And when would they have the time? More typical mileage reimbursement options—whether it’s adhering to the latest IRS rate or providing the average car allowance—are far easier to set up in-house.
Pretty much anyone and everyone (possibly depending on Motor Vehicle Record reports) qualifies for a mileage reimbursement. They be applied to any size of driver pool, from large to small, with relative ease. It might not always be accurate or fair to employees, but it can be made to work. FAVR has requirements. Employees have to meet a 5,000-mile minimum each year to qualify for FAVR. That means driving around 400 miles each month. For some that may seem like a lot. For others, that may sound typical. Additionally, because of the lift involved, vehicle program vendors will have a minimum driver count of somewhere between 10 and 20 to implement the program.
The results in this matchup of FAVR vs mileage reimbursement are in. While a traditional mileage reimbursement program is easier to set up in-house and doesn’t have as many qualifiers for who receives it, they lack the flexibility and accuracy of a FAVR reimbursement. And there’s the issues of IRS compliance and taxability. But, ultimately, the clear winner depends entirely on your company’s situation.
If you’re a small company in the market for your first vehicle program, you’ll likely get plenty out of a cents-per-mile program. If you’re a bigger company struggling with your current program and hoping to cut down on taxability and compliance issues, FAVR is more likely the way to go. And it could be that your company may need more than one program! And that’s okay too.
Looking to learn more about FAVR and other mileage reimbursement programs? Check out our guide, Variations in Mileage Reimbursement.