In late August, Governor Bruce Rauner signed an amendment to the Illinois Wage Payment and Collection Act. Effective January 1, 2019, the Act requires employers to “reimburse an employee for all necessary expenditures” they incur as a result of doing their job. Employees have 30 days to submit documentation regarding the expense. Additionally, employers may establish a written expense reimbursement policy that provides guidelines for what constitutes authorized expenses.
The amendment is similar to one passed in 2015 that amended California Labor Code 2802. That law requires employers to reimburse their employees “for all necessary expenditures or losses incurred by the employee.”
As an Illinoisan, I’m interested in seeing how the law will be interpreted and implemented in my home state. As the CRO of a software company who helps employers reimburse traveling the right amount every time, I know that the California law has had particularly interesting implications for how employers treat expenses related to using a personal vehicle for work use.
In many cases, organizations have chosen to reimburse their employees at a standard rate for business travel. Currently, the most common is the IRS Safe Harbor Rate, which sits at 57.5 cents per mile. But, I’m an employee of the company that consults with the IRS to produce this rate each year. I know that it is not meant to be a reimbursement guideline. Rather, it is the maximum amount that an employee can receive tax-free without meeting specific documentation requirements.
And depending on the amount the employee drives for work, it may not cover the full costs. Consider a retail merchandiser using their personal car. Let’s say they drive 100 miles each week to visit each store in a region where they stock shelves. At 58 cents, their company will reimburse them around $3,000 per year. Depending on the cost of fuel in their town, this may not be enough money to cover their gas bill. Fuel prices vary widely from place to place. But it is probably not enough to also cover other proportional costs. These include vehicle registration, insurance, and maintenance fees for having the vehicle ready to use.
Proper reimbursement of the business mileage driven was a core issue in a recent case involving the California-based employees of Walgreens (an Illinois-headquartered company). The retailer ultimately paid $1.5M to settle the CA 2802 claims involved in a $23M settlement of nine wage and hour class action lawsuits.
Illinois-based Jimmy John’s Gourmet Sandwich company also was the target of a class action lawsuit claiming that a flat per-delivery reimbursement rate regardless of time spent or distance traveled was inappropriate – not only because of varying miles traveled, but also because it failed to capture all of the expenses involved in insurance and maintenance of the vehicle.
Rather than an arbitrary delivery charge or a one-size-fits-all application of the IRS Safe Harbor rate, there is one reimbursement method that is recommended by the IRS for use. The Fixed And Variable Rate (FAVR) method allows employees to provide a tax-free monthly amount that varies by employee to cover their actual costs for having a vehicle ready to use. This monthly amount covers fixed costs like vehicle registration, depreciation, and licensing. Then, for each mile the employee drives, they receive a variable per-mile reimbursement. This covers the costs of gas and maintenance. That amount is specific to the actual cost of those items in the location the employee drove at the time they drove.
At Motus, we help thousands of companies administer FAVR programs – more than any other company who works with reimbursements. We know that it is an accurate reimbursement method. Employers use it for compliance with the requirements of the CA 2802 (and now the new Illinois law). Consequently, we know it is typically less expensive on the whole than whatever method an employer is currently using with their employees.
As Illinois prepares for the Wage Payment and Collection Act amendment to go into effect, I suspect to see a change. More employers are likely to move to a Fixed and Variable Rate reimbursement program to deal with their vehicle expenses.