In the first installment of the HR Hangout, we introduced the fact of HR leaders developing more influence and expertise among other executive leaders of their business. According to a study carried out by Harvard Business Review, Why Chief Human Resources Officers Make Great CEOs, this increased influence has led to a more collaborative environment between the modern HR leader and Finance leader – specifically when it comes to making critical, informed decisions that will have a widespread impact on the business. To make these decisions, HR and Finance leaders must first developed trust. Once developed, HR leaders can better introduce new policies and manage change. In this post, we’ll use some of those takeaways to cover how the HR leader can implement mileage reimbursement policy that is not only compliant, but produces cost savings for the business.
When evaluating and considering a mileage reimbursement policy, HR leaders should understand the following:
- The difference between reimbursement and compensation under a flat car allowance reimbursement program.
- How to implement mileage reimbursement policy that is compliant with state and federal laws.
- How to communicate the selected mileage reimbursement policy across the business in a way everyone can understand.
Understand the difference between reimbursement and compensation with a car allowance program
For today’s HR leader, administering a car allowance for the business seems like a viable employee recruiting and retention strategy. If your employees come onto a program believing they’ll have a higher wage, they’ll feel more valued in the eyes of the organization, right? Possibly – but this theory has more flaws than it does benefits.
When companies treat reimbursement as a part of compensation, it becomes exposed to tax in the same way. Flat car allowance programs are subject to income and FICA taxes. This not only costs your employees, but costs your business as well.
The other component of this relates to undesired employee behavior that could negatively impact the business. If employees know their employer reimburses them at the same flat rate each month, they’re likely to drive fewer miles. They ultimately view this reimbursement as a form of compensation. That could potentially result in sales reps closing fewer deals, generating less revenue and inauthenticity across your business. Reimbursement is not the same as compensation, and it’s crucial for today’s HR leader to understand that difference.
Implement a mileage reimbursement policy that is compliant with state and federal laws
With a one-size-fits-all flat allowance program, each employee receives the same amount each month. That’s regardless of where and how much they drive. Which is flat out wrong. Employers should not reimburse an employee that drives 25,000 business miles per year in Boston the same amount as an employee that drives 17,000 miles per year in Boise, Idaho. It’s neither fair or accurate.
Part of this process for the HR leader involves mitigating risk by learning about state and federal labor laws. California Labor Code 2802, specifically, has cost businesses millions of dollars in class-action lawsuits for not reimbursing their mobile employees the exact, true cost of doing business – and it’s not just California where these lawsuits are taking place.
To avoid costly legal consequences, HR leaders should evaluate personalized mileage reimbursement programs that account for individual employee costs. These fixed and variable costs will vary by employee. They include insurance premiums, license and registration fees, personal property tax, depreciation, fuel, tires and maintenance. This type of mileage reimbursement program is called a Fixed and Variable Rate (FAVR) reimbursement program. The IRS only recommend FAVR as a mileage reimbursement program. These programs are also beneficial for the business because they can be automated with technology. Personalized mileage reimbursement programs reward companies because they uncover hidden cost savings and keep them compliant with state and federal laws. They also benefit the employee reimbursed for their exact cost of doing business.
Communicate the policy internally with a plan
Once a desired mileage reimbursement policy has been decided upon, it’s crucial for the HR leader to have a communication plan in place for implementing the new policy. This plan should:
- Train employees on the new policy
- Account for any necessary policy adjustments over time
- Continually assess policy performance
This gives the entire organization understanding on the new mileage reimbursement policy and preparation for what’s to come.
When evaluating different options for mileage reimbursement policies, today’s HR leader must understand the difference between reimbursement and compensation with flat car allowance programs, choose a mileage reimbursement policy that is compliant with state and federal laws, and effectively communicate the new policy across the business. Stay tuned for the next installment of the HR Hangout.
The HR Hangout is a recurring series on the Motus blog featuring advice from Jessica Chronchio, Director of People Operations at Motus. A proven Human Resources leader, Jessica has her Master’s Degree in Human Resources Management and is an active member of SHRM (Society for Human Resource Management). The topics covered range from empowering HR in the boardroom, best practices around people management, insights on industry trends, and advice for today’s HR leader.